Taking the example of a freelance web designer (using the 11% Advertising rate). This web designer typically bills clients £40,000 per year (excl VAT) but only has expenses of about £5,000 per year (excl VAT).
Under the standard VAT scheme he would owe HMRC £8,000 (40,000 x 0.2) per year on his sales offset by £1,000 (£5,000 x 0.2) of purchases. A net payment of £7,000. Remember there is no ‘loss’ here and no ‘profit’ either. Everyone is just collecting cash on behalf of HMRC.
Under the Flat Rate Scheme the web designer would have a rate of 11% of sales. So he will pay £5,280 (48,000 x 0.11). That’s it. The web designer has effectively just made £1,720 (£7,000 – £5,280) of profit by registering for the flat rate scheme.
Whether it will be beneficial or not comes down to the proportion of expenses to sales. Sticking with the £40,000 of sales, it will still be beneficial until the VAT that would be recoverable exceeds £5,200 (ie, the value of VAT-able expenses exceeds £14,000) or if you prefer percentages when the expenses exceed 35% of sales.
As HMRC calculate average levels of profitability when coming up with their rates it means that if you are more profitable than your industry average you will tend to benefit.