Flat Rate VAT

Could FRS help your business?

VAT can be a complicated area for self-employed contractors - to start with you have to work out which VAT scheme you should be on. If you earn over the VAT threshold you have to register for the standard VAT scheme, but if you earn under that it can beneficial for you to sign up to VAT.

How the Flat Rate Scheme (FRS) Works

The Flat Rate VAT Scheme (FRS) is designed to encourage more businesses to sign up for VAT.

The FRS is a simplification scheme NOT a tax allowance. There were a number of changes made to the scheme on 01 April 2017, which means that the FRS has changed for some businesses and may no longer be advantageous.

From 01 April 2017, HMRC introduced an additional flat rate of 16.5%. This rate will apply to businesses in any sector, but ONLY if they have limited costs.

You are a limited cost business if the cost of your GOODS is below 2% of your turnover, or below £1000 per year.( If your VAT return is for less than one year, the figure is the relevant proportion of £1,000, for example, on a quarterly return this is £250)

The cost of GOODS excludes; 

  • Any services – including labour 
  • Goods used for private use 
  • Capital items for example, tools and machinery, office equipment, laptops, mobile phones, tablets 
  • Food or drink consumed by you or your employees 
  • Motoring costs, unless your category of business is transport and you own or lease a vehicle for your business 
  • Goods that you resell, lease, let or hire out – unless this is normally part of your main business activity 
  • Goods that you give away as promotional items, gifts or donations

If you are not a limited cost business then the FRS may be beneficial for your business

The existing flat rates will continue to be available for those flat rate businesses that don’t qualify as a limited cost business. It means that you can charge VAT on the invoices that you issue but you pay across an agreed percentage as VAT, but don’t claim back your expenditure.

The best thing to do is discuss your business and requirements with us and we will work with you to ensure you are on the best scheme.

RIFT Accounting will manage the whole Flat Rate VAT process, from start to finish.

  • Registration and set up
  • Quarterly VAT Returns, based on the information you supply us
  • All reporting and communication with HMRC

Changes to Flat Rate Scheme (FRS) - Limited Cost Trader. VAT illustrations

 

Current rules

New rules

£

£

Value of goods/services supplied

10,000

A

Value of goods/services supplied

10,000

A

VAT at 20%

2,000

B

VAT at 20%

2,000

B

Invoice total

12,000

C

Invoice total

12,000

C

VAT payab le to HMRC at 12% of invoice total

1,440

D

VAT payable to HMRC at 16.5% of invoice total

1,980

D

Gain on FRS

560

Gain on FRS

20

Based on these illustrations the gain on £10,000 o f sales reduces to just £20. Th is is likely to be less than any VA T that has been paid on expenses.

 

 

 

For more on the Flat Rate VAT schme get in touch now.

 

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