VAT Flat Rate Scheme (FRS)
Mark Thompson Chartered Accountant Warrington expands on how The VAT Flat Rate Scheme offers smaller business an opportunity to:
- Reduce the amount of VAT they have to pay to HMRC thus increasing their profits
- Reduce the paperwork burden
The flat rate VAT scheme is an incentive provided by the government to help simplify taxes and reduce the administrative burden on small businesses. It is available to businesses whose annual turnover does not exceed £150,000. However, as well as simplifying the work required to complete quarterly VAT returns it also presents an opportunity to some businesses to reduce the amount of VAT that they have to pay over to HMRC. As a result, the business could be significantly better off financially.
If a business chooses to use the Scheme it still charges VAT at the usual rate of 20% (November 2011) on its invoices. However rather than having to calculate all the VAT that they have incurred on their purchases they can instead elect to just pay over to HMRC a lower percentage rate of the VAT that they have charged their customers. The VAT percentage they pay over is considerably lower than that of the standard VAT rate. The rate of VAT paid over to HMRC differs depending upon the trade undertaken by the business. You can locate which rate applies to your business via this link:
For example, a management consultant would pay VAT to HMRC at a rate of 14% of the gross invoice value of sales. If the business has a turnover of £120000 per annum then the effect of adopting the FRS would be:
|Net amount invoiced to clients||£120000|
|VAT charged on top to clients (20%)||£24000|
|Flat rate VAT @ 14.0%||14.0%|
|VAT to be paid to HMRC – 14.0% of £144000||£20160|
|VAT received from clients not paid to HMRC||£3840|
Additionally, in the 1st year of trading a business can reduce the amount of VAT that it must pay over by a further 1%.
Based on a 46 week working year, the following additional income could be earned each year:
£200 per day turnover – £1,472 extra per year
£400 per day turnover – £2,944 extra per year
£600 per day turnover – £4,416 extra per year
If a business accounted for VAT on purchases using the standard method, it would reduce the amount of VAT that it pays over by the actual amount of VAT that it incurred on those purchases. The amount actually saved by using the FRS compared to the standard VAT scheme is the difference between the 2 methods. So if a business makes a lot of purchases that include VAT, it may not be better off using the Flat Rate Scheme. However any business that has very few purchases is most likely to be better off using the scheme.
Important notes about the FRS:
1. If you estimate that your annual turnover excluding VAT will exceed £150,000 in your first year, you shouldn’t join the scheme.
2. If your annual turnover exceeds £230,000 of VAT inclusive revenue in subsequent years you must come off the scheme.
3. Companies on the flat rate scheme are unable to claim back any VAT on purchased goods and expenses for their business. You can however reclaim VAT on capital purchases over £2,000, for example a van, plant & machinery or computer equipment. Providing all the capital purchases are on the same receipt such as a PC, printer and scanner you can claim the VAT back on these items. You cannot however buy a PC one month for £1,500 then a printer the next month for £300 and a scanner the month after for £200 and add them together – they must all be on the same receipt.
4. Like standard VAT, the flat rate scheme still requires you to complete a quarterly VAT return form. You will need to charge the standard VAT rate, currently 20%, (November 2011) on your sales invoices. However, rather than accounting for the VAT on every purchase, when you do your quarterly report you will only pay a single flat rate percentage on your turnover for that quarter.
Advantages of using the Flat Rate Scheme
- The ability to earn money from VAT, you can earn thousands of pounds extra each year simply out of VAT (the government does this as the FRS is simple for them to manage and you are in affect acting as a tax collector).
- A reduced amount of paperwork to handle as you are not submitting any of your input costs to HMRC all you need to do is keep the receipts from your purchases.
- If you are a new business, using the flat rate scheme in your first year, you receive a further 1% decrease on the overall percentage tax you pay each quarter.
- You can still reclaim the VAT suffered on any large capital purchases (cost > £2000)
Disadvantages of using the Flat Rate Scheme
- If you are buying lots of stock or have high VAT chargeable expenses you will miss out on reclaiming the VAT.
The FRS is therefore the chosen scheme for many small businesses. It is certainly the scheme that is recommended for businesses that have very few VAT chargeable purchases and expenses.
If you would like to discuss which VAT scheme would most benefit your business contact us on 01925 212282 or send an email enquiry here.
The author does not guarantee the accuracy of any information provided in this article and recommends that you do not take any action, whatsoever, based on the information provided. By the fullest extent permitted by law, the author does not accept any responsibility for any actions you may or may not take based on information contained in this article. This article contains general information and is not a substitute for specific independent professional advice. In addition it is emphasised that much of the information provided in this article is time sensitive. Whilst it is accurate at the date of publication (November 2011) information contained within it may be out of date.