If you believe the headlines and news broadcasts, the increase in the VAT rate to 20% will just about nail down the coffin lid on the UK economy. In search of this year's reason as to why retailers have never had it worse, the favourite culprit is the increase in VAT but regardless of individual opinions, the increase in rate does throw up a number of practical issues one of which is the impact on smaller businesses using the various flat rate schemes.  

Flat Rate Schemes are designed to ease the burden of the complexities of VAT accounting for small businesses by enabling a business to make supplies to customers and charge VAT at the standard rate which is now 20%, but pay to HMRC a much lower rate.   

The rate a business pays to HMRC depends upon the type of trade carried out. For example, on an invoice of £600 plus VAT of £120, a vehicle repair business would pay a VAT rate of 8.5% giving them a saving of £69, whereas an IT consultant would pay 14.5%, giving a saving of £33.

Neil Dawson, associate director of VAT at RSM Tenon in Birmingham, said: 

"For once there is some good news for businesses. Those operating under a Flat Rate Scheme are unlikely to feel the full impact of the headline increase in VAT because while they will be charging their customers the new rate of 20%, they will be paying the lower rate to HMRC, and, in effect, pocketing the difference.

We urge all small businesses not currently operating under a flat rate scheme to consider the merits of doing so. Businesses that benefit from using this scheme are those with an annual turnover of less than £150,000 and with little or no overheads."