The Flat Rate Scheme (FRS) is an alternative way for a small business to account for VAT, the purpose of the scheme being that it reduces the administrative burden on small businesses by allowing them to keep simplified and less detailed VAT records.
The basic mechanics of the scheme are that, in return for giving up the right to claim VAT on it’s regular purchases, a small business declares VAT on the gross value of ALL their sales, including zero-rated and exempt sales, at a reduced percentage.
That rate is set by HMRC according to the business’s main business activity and may be subject to a further 1% reduction in the first year of VAT registration.
The scheme does however allow a business to claim VAT on larger value purchases of individual goods that are capital assets of the business.
A word of warning though.
Despite its purpose the use of the scheme may mean that a business receives the additional benefit of paying less VAT than if they were not using the scheme but it can also result in the opposite, with the business paying more VAT than if they were not using the scheme.
However, with effect from 1/4/2017 HMRC have introduced a mandatory test into the scheme to try to reduce the sometimes significant financial benefit some businesses have enjoyed in the past. Businesses that fail this mandatory test have to calculate the VAT due on their gross sales using a rate of 16.5% instead of their normal reduced rate percentage. HMRC have referred to such businesses as Limited or Low Cost Traders.
This additional test will obviously make use of FRS much less unattractive to some businesses so it is important to consider your businesses circumstances and whether they would likely be a Limited Cost Trader before deciding to opt for the scheme.
It is not possible to say as each business’s specific circumstances will have an impact on this.
That said, a business that makes predominantly zero-rate or exempt supplies are less likely to find themselves with a financial benefit than a business that makes predominantly standard rate sales.
As long as:
The VAT exclusive value of all taxable supplies (standard-rated, reduced rate and zero-rated supplies).
Either apply online on www.gov.uk or download and complete form VAT600FRS, which can be downloaded from the same website (VAT Notice 733 Para 5.2 provide link). If the application is accepted HMRC will issue a letter confirming acceptance onto FRS and the effective date from which FRS is to be used.
HMRC publish a list of rates, separated into trade sectors, within their guidance at FRS7200 and FRS7300. Use the trade sector closest to your main business activity but be careful to read them all before selecting the appropriate one as HMRC will not agree your choice at the time of application but could, at a later date, decide its wrong and if they consider the rate should have been higher they will want any additional VAT due.
Select the rate for the trade sector that is closest to the business activity that provides the largest proportion of your turnover.
The reduction only applies for the first year of VAT registration, not the first year of using the scheme. If you join the scheme part way through your first year of VAT registration the 1% reduction will still apply for the remainder of your first year of registration.
Yes. The restriction on claiming VAT while using the scheme only applies to purchases made after while using the scheme. VAT incurred on purchase of goods and services prior to VAT registration can be claimed under the normal rules governing pre-registration recovery of VAT.
Yes but only in regards to a single purchase of capital goods of £2000 or more. This can be of a single item or a number of associated items which are purchased from the same supplier, at the same time and are charged to you on the same invoice.
No, even if the cost of those services is £2000 or more.
Yes. You should raise an invoice charging VAT to your customer at the VAT rate that would normally be charged on your supply if you were not using FRS.
Calculate the total gross value all your sales in the VAT period, including exempt sales and sales of goods to business or private customers in the EC and then multiply this figure by your FRS rate.
At each anniversary of your joining FRS you must review your turnover (again including VAT as well as all exempt and EC Sales) for the previous year and must leave the scheme if:
If your gross expenditure on relevant goods is either less than 2% of your FRS turnover in your VAT period or is less than £1000 for annual VAT period (£250 if your VAT period is a normal quarterly VAT or £83.33 if your VAT period is a monthly VAT period) then you will be a Limited or Low Cost Trader and will be forced to use the 16.5% rate.
Technically, yes, although if you buy and sell goods as your main business activity, for example if you are a retailer, manufacturer or restaurant, you are much less likely to fail the test than if your main business activity involves you providing services and you have little or no expenditure on goods.
There is no definitive list of what are considered to be relevant goods, although HMRC provides some guidance within para 4.6 of HMRC VAT Notice 733.
However, we have had numerous queries in regards to “relevant goods” so here is some basic guidance as to what are not “relevant goods”, based upon queries that have already been asked of us:
Current HMRC guidance is provided on www.gov.uk in
VAT Notice – 733
HMRC Manuals – VAT Schemes – Flat Rate Scheme
This guide was provided by Qdos Vantage – Specialist Fee Protection providers.
If you are in business, whether as an individual, a partnership or as a Limited Company, then you must register for VAT once your taxable turnover reaches a certain threshold. If you do not register for VAT at the right time you could be subject to penalties.