Flat Rate Scheme
VAT is the most complicated tax that a business has to deal with on a daily basis. Using standard VAT scheme, your VAT liability is the difference between the VAT you charge on your sales and the VAT you incur on your purchases.
If your business predominantly sells to other VAT-registered businesses and the amount of VAT you recover on your purchases is fairly low, the Flat Rate Scheme might be better for you. It could not only reduce your bookkeeping time and cost but it could benefit you financially. The Flat Rate Scheme often works well for IT contractors, management consultants or couriers.
Using the Flat Rate Scheme you are still required to charge standard VAT, currently 20% (2014 ) and submit VAT returns, however rather than accounting for the VAT on every purchase, when you do your quarterly return you will only pay VAT as a fixed percentage of your VAT inclusive (or gross) turnover. The actual percentage you pay depends on your type of business.
The VAT percentage you pay under FRS is considerably lower than that of the standard VAT rate and you then keep the difference as your profit.
Example for limited company specialising in Management consultancy:
Net amount invoiced to client : £10,000
Standard VAT 20% : £2,000
Gross invoice : £12,000
FRS VAT : 13 % /this includes 1% discount for the first year/
VAT to be paid to HMRC : 12,000 x 13% = £1,560
VAT received from client : £,2000
Profit : £440
You could join the Flat rate scheme if your expected VAT taxable turnover for the next year is £150,000 or less, you have not been late with VAT returns for the last 12 months and you have not been investigated for VAT fraud.
Other benefits of using the FRS
- You don’t have to record the VAT that you incur on every payment, as you do with standard VAT accounting. This means you spend less time on bookkeeping and deciding what you can and can’t claim the VAT on
- A first year discount. If this is your first year of VAT registration you get a one per cent decrease in your flat rate percentage
- Peace of mind. With less chance of mistakes, you have fewer concerns about getting your VAT right
- Certainty and planning. You always know what rate of your takings you will have to pay to HMRC
Companies on the flat rate scheme are not able to claim back any VAT on purchased goods and expenses for their business. You can however recover VAT on capital asset purchases with VAT inclusive value over £2,000, for example a PC.
The VAT FRS might not be right for your company if:
- You buy a lot of standard-rated materials, as you cannot generally reclaim any VAT on your purchases
- You regularly receive a VAT repayment using standard VAT accounting
- You receive rental income
- You make mostly zero-rated or exempt sales
Please contact us if you have any questions regarding your VAT.