Flat rate schemes (FRS) for VAT may sound simple but continues to cause problems for businesses.
Here we set out some of the basic rules of the scheme.
How VAT FRS work
The FRS basically works by applying a set percentage to the gross sales for a period. These percentages have been calculated by HMRC to reflect the average VAT bill by business sector. These percentages as well as further information on FRS can be found here
You can join the scheme to if your estimated “VAT taxable turnover” – excluding VAT – in the next year will be £150,000 or less.
The “VAT taxable turnover” for this purpose is everything that you sell during the year that is liable for VAT. It includes standard, reduced rate or zero rate sales. It excludes the actual VAT that you charge, VAT exempt sales and sales of any capital assets – but see below.
You may still be able to claim back the VAT on capital assets worth more than £2,000.
Once you join the scheme you can stay in until your total business income exceeds £230,000.
The FLS isn’t for everyone and you cannot join the scheme if:
- You are, or have been in the scheme within the last 24 months
- You are eligible to join an existing VAT group
- You are registered for VAT as a division of a larger business
- You have been convicted of a VAT offence or charged a penalty for VAT evasion in the last year
- Your business is closely associated with another business.
Potential benefits of a FRS
- Spending less time on the books as you don’t have to record the VAT that you charge on every sale and purchase, as you do with standard VAT accounting. Meaning more time spent on your business. Just as you do for normal VAT accounting. You will need to show VAT separately on your invoices.
- If you are in your first year of VAT registration you can take advantage of a first year discount. You get a one per cent reduction in your flat rate percentage until the day before the first anniversary you became VAT-registered.
- You no longer have to work out what VAT on purchases you can and can’t reclaim.
- Less chance of mistakes, you have fewer worries about getting your VAT right.
Potential disadvantages of a FRS
The flat-rate percentages are calculated in a way that takes into account zero-rated and exempt sales. They also contain an allowance for the VAT you spend on your purchases. So the VAT flat rate scheme might not be right for your business if:
- You regularly receive a VAT repayment under standard VAT accounting.
- You make a lot of zero-rated or have exempt sales or other income (including for example the sale of a car by a business)
- Extra care is required by sole traders as they are registered persons and all income from whatever source can be captured in the net.
Therefore whilst the flat rate scheme might look attractive to small businesses there are traps. When in doubt, take advice. Contact us on 08453651000