In a previous post I briefly mentioned that the Flat Rate Scheme (FRS) could simplify your VAT accounting and also save you some money along the way. With this short post I’ll aim to give you a better understanding of the scheme.

The simplest way to describe the FRS is: You pay a set percentage of your VAT inclusive turnover to HMRC, but you cannot claim VAT back on purchases. The percentage will differ from business to business.

There are some qualifying criteria that your business must meet:

• Your estimated VAT taxable turnover – excluding VAT – in the next year will be £150,000 or less.
• Once you join the scheme you can stay in it until your total business income is more than £230,000.

You cannot join the FRS if:

• You were in the scheme and left during the previous 12 months
• You are, or have been within the previous 24 months
  • Eligible to join an existing VAT group
  • Registered for VAT as a division of a larger business
• You use one of the margin schemes for second-hand goods, art, antiques and collectibles, the Tour Operators’ Margin Scheme, or the Capital Goods Scheme
• 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

If your business provides a service and your purchases are minimal the FRS could be beneficial to you as you may possibly pay a lower amount of VAT than if you were registered under the standard scheme.

For example, if your business is a computer repair company the rate of VAT you would pay under the FRS would be 10.5% (9.5% in the first year as you are given a deduction). If your sales for the quarter were £20,000, the amount of VAT you would pay is £1,900 (£20,000 x 9.5%). Under the normal scheme you would have paid £4,000 less any VAT on purchases.

In this example if your purchases for the quarter are below £10,500 net (VAT – £10,500 x 20% = £2,100) you would be saving money by being part of the FRS .

The two major advantages of the FRS are:

• Peace of mind. With less chance of mistakes, you have fewer worries about getting your VAT right.
• Certainty. You always know what percentage of your takings you will have to pay to HMRC.

As always with important decision like this take time to investigate if it would represent a significant saving to your business. If you are unsure always seek advice from someone!

 

Flat Rate Scheme for VAT