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Normal VAT scheme and the Flat Rate Scheme

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Nearly all of our clients operate FRS to make additional income for their business. If you have any major purchases to make such as a computer/office furniture etc its best to purchase these before you register for FRS to enable your company to claim back the vat on the purchases eg register for vat 1/8/14, make major purchases by end of August, then register for FRS from 1/9/14.

Detailed info:

Normal scheme is where VAT is collected on company sales @ standard rate of VAT (currently 20%) and pay this across to the Customs & Excise less the VAT that your company has incurred on its expenses.

FRS (Flat Rate Scheme) is where VAT is collected on company sales @ standard rate of VAT but pay across to the Customs & Excise at a given rate on the gross turnover ie sales value + VAT (eg 14.5% for IT Consultants with reduction to 13.5% in the first year).There is no allowable deduction for input tax on expenditure (except for capital items over £2000).

The FRS aims to simplify VAT Accounting for small businesses. The scheme is available to most businesses whose taxable turnover (excluding VAT) is expected to be no more than £150,000 in the next 12 months and total business income less than £187,500. The scheme can continue to be used until VAT inclusive annual turnover exceeds £230,000.

Whether or not to apply depends on the relationship to forecast Vatable income Vatable expenditure.

For example, with sales of £150k per year and vatable expenses of £8k per year, there is a saving of roughly £2,300 per year to operate the FRS at 14.5%.

With sales of £70k and vatable expenses of £8k per year, there is a saving of £220 per year (£1060 in the first year @ 13.5%)

With sales of £70k and vatable expenses of £4k per year, there is a saving of £1,020 per year (£1100 in the first year @ 13.5%)

With sales of £70k and vatable expenses of £2k per year, there is a saving of £1,420 per year (£2060 in the first year @ 13.5%)

With sales of £50k and vatable expenses of £2k per year, there is a saving of £700 per year (£1500 in the first year @ 13.5%)

 

There is also a link for FRS on the HMRC website to help is the assessment:

 

http://www.hmrc.gov.uk/vat/index.htm

 

Most of our clients use the FRS and generate additional income of over £1,000 per year. 

You can come off the FRS scheme into the normal scheme at any time from the start of a VAT Quarter, subject to the annual turnover restrictions outlined below.

The scheme can continue to be used until VAT inclusive annual turnover exceeds £230,000. HMRC say you should check your sales levels on the anniversary of your VAT registration date each year. 

As a rough idea, if your total expenses including the VAT element are above 10% of your turnover excluding VAT, you will be better off under the normal VAT scheme (and below 10% be better off under the FRS scheme).

Once your company leaves the scheme, it will need to wait 12 months to re-apply.

 

Article Source: Graeme Bennett ACMA MBA of Forbes Young

Source: Graeme Bennett ACMA MBA of Forbes Young

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Steve has been associated with the UK Contracting industry for over a decade now. He is a sports enthusiast and a die hard Arsenal fan.

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