Contractors' Questions: How to handle profit from VAT Flat Rate Scheme?

Contractor’s Question: I’ve just started using the VAT Flat Rate Scheme and it appears it’s going to be financially beneficial for me. But how should I handle profit I have made on the scheme when it comes to completing my tax return? Is the profit my businesses’ income?

Expert’s Answer: The basic answer is that the profit you make in using the VAT Flat Rate Scheme does indeed increase your business profit and as such it is, in principle, taxable for the purposes of direct tax.

There is no requirement to keep a separate account of the ‘VAT profit’ arising from use of the scheme; it just adds to your profits that you will normally report to HM Revenue & Customs.

For record-keeping purposes and analysis of VAT, HMRC has confirmed that for direct tax purposes there is no additional analysis required and the standard of records is the same for both taxes. Therefore, in effect, your accounts should be similar to those of a non VAT registered business, as your income will be gross receipts less the Flat Rate VAT percentage and your expenses will include the irrecoverable input VAT.

The expert was Steve McIntyre, a VAT Director at The VAT Consultancy.