Can VAT help to boost your profits?

Category: LeisureTaxation - Posted On: Dec 3 2019


The VAT Flat Rate Scheme allows some smaller businesses to benefit from paying a lower rate of VAT to HMRC. The scheme is often used by contractor type businesses, but is less widely used in the leisure sector.

Instead of declaring the standard 20% on sales, you pay a lower percentage to HMRC that varies depending on the sector category of your business.  Generally VAT on costs cannot be reclaimed except for capital assets over £2,000.

For example, a holiday accommodation rental would raise an invoice for say £1,000 plus £200 VAT to the customer, with the £200 ordinarily paid to HMRC. Under the flat rate scheme, you pay over 9.5% of £1,200 (the VAT inclusive price) which is £114, keeping the £86 difference for yourself!

The benefits of the VAT Flat Rate Scheme are:

  • Increased profits as some of the VAT charged can be kept by the business
  • Easier to calculate the VAT as you only need to look at the business income
  • VAT on some larger expenses can be reclaimed (some capital goods over £2,000)
  • VAT registration can give the perception of a well-established business and the flat rate scheme reduces the administrative burden
  • There is a further 1% discount in the 1st year as a VAT registered business.

However, the VAT Flat Rate Scheme is not suitable for everyone. It generally only suits businesses with a relatively low cost to sales ratio but do not fall into the “limited cost trader” category. The drawbacks of the scheme are:

  • Your turnover must be below £150,000 to join and you must leave if your turnover exceeds £230,000. There is a more complex calculation if you have reduced-rate or exempt supplies.
  • You can’t reclaim the VAT on most costs.

If you are defined as a limited cost trader, the flat rate percentage is increased to 16.5% which negates the benefits stated above.

If you would like more information on whether this scheme could work for your leisure business, please contact our EQ leisure team on leisure@eqaccountants.co.uk or call one of our offices.

Alternatively, if you have any queries regarding VAT, email our VAT Taxperts.