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.
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.
For contractors, the main factors that will prevent them from joining the scheme are:
The FRS may not be suitable for businesses that:
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.