Flat Rate VAT Scheme Guide (FRS)
Flat rate VAT is a scheme introduced with the aim of simplifying taxes for some small businesses and also gives the businesses themselves the chance to earn some extra revenue through the system. In basic terms, you would charge VAT at the usual rate, most likely 20 per cent, on your goods and services, but you do not pay back this full amount to HMRC. Instead, you pay them a lower rate, as low as 4 per cent in some sectors, but most commonly between 11 per cent and 14.5 per cent.
You cannot claim VAT back on business purchases you make, but you do get to keep the difference between the 20 per cent you charge and the lower amount that you pay back to HMRC. It also simplifies your calculations for VAT returns as you do not need to keep track of all your VAT expenditure.
To give a working example, a freelance bookkeeper or accountant registered for the flat rate scheme would be eligible to charge 20 per cent VAT on their invoices to clients, but pay back 14.5 per cent to HMRC – this is also reduced to 13.5 per cent in the first year.
- £1,710 a year based on charging £200 per day
- £2,992.50 a year if charging £350 per day
- £5,130 a year if charging £600 per day
This boost to your annual income is a good incentive for many contractors, consultants and freelancers to choose to operate under the Flat Rate Scheme. It only applies to businesses with a turnover of less than £150,000 per year, but it can make you significant cash savings, especially if your line of work means you do not make many taxable business purchases throughout the year, for example if your business does not rely on buying stock or if your main expenses are zero VAT rated.
Things to remember about the flat rate scheme:
- You cannot join the scheme if you estimate your annual taxable turnover will be more than £150,000.
- If you have already joined the scheme you can stay in it until your turnover hits £230,000 a year.
- You will be unable to claim back VAT on most goods and expenses purchased through the business, so it is not likely to be suitable if you pay a lot of VAT on stock, services or items throughout the year.
- You can still claim back VAT on capital assets costing £2,000 or more, such as computer equipment, even equipment bundled together in one purchase so long as it is on one receipt, for example, a computer, scanner and printer.
- As with any company registered for VAT, you will need to charge the full rate of VAT on all your goods and services and you will still need to submit a VAT return every quarter. However, paying a flat rate of VAT worked out as a percentage of your quarterly turnover makes the calculations much more simple.
Key advantages to the Flat Rate VAT Scheme
- Extra revenue. You are essentially acting as a collection agent for HMRC and helping them by simplifying the paperwork, so you are allowed to keep some of this extra revenue as an incentive. As the calculations show above, this can mean you keeping thousands of pounds of extra income a year.
- Simplified paperwork. Quarterly VAT returns are much less complex when you only have to calculate a flat rate percentage of your turnover and you do not have to keep track of all the VAT you have been charged on your own business expenses.
- New businesses get further financial incentives as they get an extra 1 per cent reduction on the VAT rate that they pay during the first year.
Disadvantages to bear in mind when considering the Flat Rate Scheme
- Businesses that buy a lot of stock or spend a lot on goods or services that are VAT chargeable will not be able to reclaim that VAT.
An accountant can help you with the calculations to work out whether or not the Flat Rate VAT Scheme is suitable for you and your business. We hope you have enjoyed our introductory guide but should you have any further questions about the scheme then please contact us on 0500 234111 / 01442 275767 or email firstname.lastname@example.org.
You may also find the following guides helpful: