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 The VAT Flat Rate Scheme (FRS)
Written by Sally Fletcher for
planIT, December 16th 2010, updated August 17th 2011 Output VAT (charged on the sales invoice) is charged at the standard rate, currently 20%.
The VAT you pay to HMRC is a fixed
percentage of your flat rate turnover. Total the income you receive including VAT from your sales invoices. Add to this any other income received with reduced rate or zero rated sales together with any bank interest received. The fixed percentage is then applied to this total and is the VAT due to HMRC.
Each industry has a different standard industry code (SIC code). You can find a full list of these here. The rates are in the Annex at the end of the document and relate to the increased VAT rates that came into effect on 4th January 2011. The rate for Computer IT and Consultancy is currently 14.5%. For the first year of registration, you are entitled to 1% discount off the rate.
Under the FRS input VAT (VAT that is included in your purchases) is not recoverable against the output VAT as usual on the standard accounting scheme. There is however, a rule that allows input VAT to be recovered when purchasing capital assets with a net value of £2,000 and over. These can be a multitude of smaller values such as a printer, computer and scanner providing they are all on the same purchase invoice and the total is £2,000 net of VAT. Remember to account for gross expenses in your accounting software.
You are able to register on the scheme if your VAT taxable turnover (the total of everything you invoice that VAT is due on, exclusive of VAT) is expected to be under £150,000 annually (calculated pro-rata).
Usually, businesses with little input VAT will make a profit (also known as VAT surplus) from using the scheme. Any profit is subject to corporation tax. HMRC have a ready reckoner tool that will quickly advise you whether the scheme would be financially beneficial to you. An IT Consultancy company using the scheme with an annual flat rate turnover of £60,000 and VAT inclusive expenses of £2,000 would pay HMRC VAT of £7800 as opposed to £8638 on the standard accounting scheme thus making a VAT surplus of £838. This does not include the first year 1% discount!
All clients that are VAT registered are initially on the standard accounting scheme. This is sometimes useful to recover any input VAT incurred in the months prior to the company incorporation, such as the purchase of office equipment. An application to change to the scheme can subsequently be made by completing the form VAT 600FRS and emailing tohttp://www.planitservices.co.uk/admin/frsapplications@hmrc.gsi.gov.uk. It is advisable to request an effective date of registration that is the first day of a new VAT quarter period. If you make the application yourself, please advise us so that we can update our records and your software accordingly. We would be happy to make the application on your behalf.
If your flat rate turnover exceeds £230,000 (inclusive of VAT) annually or is reasonably expected to exceed £230,000 in the next 30 days then you need to leave the scheme and revert to standard VAT accounting. These rates came into effect 4th January 2011. If you exceed the annual exit threshold as a result of one transaction, but in the next year expect the VAT inclusive annual flat rate turnover to be less than £191,500 (4th January 2011), then you may, with the consent of HMRC remain on the scheme.
If you leave the scheme, you
cannot re-join for a full 12 months.
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