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Rough Guide to Flat Rate Scheme

For those businesses with a turnover between £77,000 – £150,000, the VAT flat rate scheme (FRS) can potentially make life a little simpler and can produce some favourable results for those on low FRS rates and modest expenditure.

Under the FRS a business pays VAT as a fixed percentage of its VAT inclusive turnover. The actual percentage will depend on the category of the business. For instance, the rate for computer and IT consultancy or data processing is 14.5%, management consultancy 14%, and computer repair services 10.5%.

There are 55 business categories and traders must select the one that best fits their activity. Where there is no exact match then this may be addressed by ‘Any other activity not listed elsewhere’ which has an associated rate of 12%.

Only one percentage can be used, so for those businesses that fall within more than one category, they must use the one which applies to the greater part of their businesses turnover. That percentage is then applied to the total turnover.

How does FRS work?

Any business that does not expect its taxable supplies in the next year to be more than £150,000, excluding VAT, can join the scheme to pay VAT as a flat rate percentage of its turnover.

Turnover for VAT purposes is the value of sales during a year. This includes those sales or other supplies that are standard rate, reduced rate or zero rate.

The scheme does not include the actual VAT charged, VAT exempt sales and disposals of capital assets.

As a general rule a business cannot reclaim input tax, i.e. VAT it pays on purchases, although there is the potential to reclaim VAT on capital assets that are worth more than £2,000.

Those businesses that join in the scheme can remain in it until its tax inclusive turnover hits £230,000.

Excluded from FRS

For contractors, the main factors that will prevent them from joining the scheme are:

  • Business was in the scheme and left during the previous 12 months.
  • Business is or has been in the scheme within the previous 24 months.
  • Business is registered for VAT as a division of a larger business.
  • Trader convicted of a VAT offence or charged a penalty for VAT evasion in the last year.
  • The business is closely associated with another business.

Pro’s and cons

Pros:

  • Reduced administration as VAT does not have to be recorded on every sale and purchase. However, VAT does have to be applied and shown, at the standard rate ,separately on sales invoices
  • Businesses in their first year of VAT registration receive a 1% reduction in their flat rate percentage which remains until the first anniversary of their VAT registration.
  • Less complexity and a simpler scheme should produce less headaches!

Cons:

The FRS may not be suitable for businesses that:

  • Regularly receive VAT repayments by virtue of standard VAT accounting.
  • Frequently purchase standard-rated items as the VAT cannot be reclaimed as a general rule.
  • Make lots of zero-rated or exempt sales.

Whether or not joining the Flat Rate Scheme is beneficial will depend on the industry sector a contractor works in and how many of their customers are VAT registered. There are tax savings to be made but before making the jump it is always advisable to seek professional guidance.

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By Qdos Contractor

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2 thoughts on “Rough Guide to Flat Rate Scheme”

  1. Blue Candy

    The comment about £2000 capital assets isn’t telling the whole story though is it? I thought it was £2k assets on a single purchase but that purchase could include a number of sub £2k items that all add up to that? So for example an £1800 laptop would not be claimable but an £1800 laptop and £300 docking station on the same invoice it would count

  2. Andy Vessey

    You are correct in your thinking. Where a single purchase of capital expenditure of goods costing more than £2K, including VAT, is made, then VAT can be reclaimed. HMRC have confirmed that the limit is met if two (or more) different assets are purchased on the same invoice as long as the total invoice exceeds £2K. It is important also to note the emphasis on the word ‘goods’, as the construction of an office extension, for instance, would not qualify for relief.

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