Flat Rate Scheme for VAT

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Q. I have recently registered for VAT. Although my turnover is only just above the VAT registration threshold, I anticipate that it will now increase year-on-year. How does the flat rate scheme for VAT work and will it help me with my business administration?

A. The VAT flat rate scheme (FRS) is used by many small businesses to help simplify their VAT reporting obligations, although some would argue that the scheme is not simple to use.

Broadly, the FRS is a simplified VAT accounting scheme for small businesses, which allows users to calculate VAT using a flat rate percentage by reference to their particular trade sector. When using the FRS, the business ignores VAT incurred on purchases when reporting VAT payable, with the exception of capital items which cost £2,000 or more.

In summary, with the flat rate scheme:

* you pay a fixed rate of VAT to HMRC; and
* you keep the difference between what you charge your customers and pay to HMRC; but
* you can't reclaim the VAT on your purchases - except for certain capital assets over £2,000.

The percentages applicable to this scheme depend on the nature of the services provided. Full details of the scheme are included in the HMRC VAT Notice 733: Flat rate scheme for small businesses.

In your first year of VAT registration you get a 1% reduction in flat rate, which means that you can take 1% off the flat rate you apply to your turnover, until the day before your first anniversary of becoming VAT registered.

The scheme works well for some but not others. On the positive side, the scheme may save you some admin because you don't have to work out every item of input and output tax, but if your customers are VAT registered, you do have to calculate the VAT and issue VAT invoices in the normal way. Financially, the flat rate averages may work out cheaper for you than normal accounting or you may find this scheme more expensive.

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Added By: Sharon Worger on 05th Jun 2020 - 10:58
Number of Views: 52
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