How We Helped a Consultant Improve His VAT Position by £4,900 in the First Year
The client
Sergio runs a successful one-person consultancy business with annual turnover of £150,000.
The business was VAT registered and operating under the standard VAT scheme. As a consultancy with relatively low overheads, the business had a modest amount of VAT to reclaim on its expenses.
When Sergio came to Taxflow Partners, we reviewed his VAT position as part of our wider review of the business.
The problem
Sergio's business was paying VAT under the standard scheme despite having a modest amount of input VAT to reclaim. This prompted us to consider whether the VAT Flat Rate Scheme (FRS) could provide a better outcome for the business.
During our review, we also looked back at Sergio's VAT history and identified a second issue. His previous accountant hadn't claimed VAT on certain eligible expenses incurred before the business registered for VAT.
This meant there was potentially VAT sitting unclaimed that could still be recovered.
What we recommended: moving to the VAT Flat Rate Scheme
We compared Sergio's position under standard VAT accounting with the Flat Rate Scheme.
Because of the nature of the business and its relatively low VAT-bearing costs, we established that moving onto the FRS would produce a better result based on Sergio's circumstances and applicable flat-rate percentage.
We therefore helped move the business from standard VAT accounting onto the Flat Rate Scheme.
What we recommended: recovering previously unclaimed VAT
We also reviewed expenditure from before Sergio's VAT registration. We identified approximately £2,500 of VAT that was eligible to be reclaimed but hadn't previously been claimed.
We corrected the position through Sergio's subsequent VAT return, generating an additional £2,500 cash-flow benefit for the business.
The result
The VAT review produced two immediate benefits. Moving onto the Flat Rate Scheme generated an estimated recurring VAT saving of £2,400 per year based on Sergio's circumstances. Recovering the previously unclaimed pre-registration VAT generated a further one-off cash-flow benefit of approximately £2,500.
That meant the overall benefit in the first year was approximately £4,900, with an estimated £2,400 annual benefit thereafter, assuming Sergio's turnover, cost profile and eligibility for the scheme remain broadly similar.
The bigger lesson
VAT registration shouldn't simply be a case of registering a business and leaving it on the same scheme indefinitely. As a business changes, it's worth reviewing whether its existing VAT setup remains appropriate.
For businesses with relatively low VATable expenditure, the Flat Rate Scheme can sometimes produce a better result than standard VAT accounting. Equally, when a business first registers for VAT, it's important to consider whether VAT on eligible pre-registration expenditure can be recovered.
In Sergio's case, reviewing both areas identified thousands of pounds that could otherwise have been missed.
Could your VAT setup be costing you money?
Our Tax Health Check looks beyond simply preparing and submitting VAT returns. We review areas including VAT schemes, previously unclaimed VAT, business expenses, remuneration, pensions and wider tax planning to identify opportunities to improve your overall tax position.
If your business has been using the same VAT scheme for several years without reviewing whether it's still appropriate, it may be worth taking another look.