Silver Financial

  • Home
  • Services
    • Contractors and consultants
    • Owner managed businesses
    • Finance Director consultancy
    • Incorporation
  • Online accounting
  • About
  • Technical blog
  • Contact
You are here: Home / Owner managed business / VAT flat rate scheme

VAT flat rate scheme

The VAT flat rate scheme (FRS) is a simple way for small businesses to reduce administration and lower their VAT bills.

With standard VAT accounting, the VAT a business pays or claims back from HMRC is the difference between the VAT charged to customers and that paid on purchases.

With FRS however a business:

  • Continues to charge its customers VAT at the full rate.
  • Pays VAT over to HMRC at a fixed percentage of its turnover (VAT inclusive) – the applicable rate depends on the business type and a list of rates can be found here.
  • Keeps the difference between the VAT charged to its customers and what it pays over to HMRC.
  • Cannot reclaim VAT on its purchases – except capital assets (such as computer equipment) over £2,000.

A business can join FRS if it is VAT registered and expects its VAT taxable turnover to be less than £150,000 (excluding VAT) in the next 12 months.

Additionally:

  • In the first year of registration there is an extra 1% reduction in the fixed rate percentage.
  • Capital asset purchases below £2,000, which would otherwise not be eligible for VAT reclaim, may be grouped together if bought from the same supplier at the same time – if the total exceeds £2,000 the VAT may be reclaimed.

A business can stay in the scheme until:

  • Its total turnover in the previous 12 months exceeds £230,000 (including VAT).
  • It expects its total income in the next 30 days alone to exceed £230,000 (including VAT).

By registering for FRS a business effectively gives up its right to reclaim VAT on purchases so the scheme is generally more relevant to those businesses with a low cost base in relation to turnover.

As a simple example of how FRS works, consider an IT consultant who raises an invoice for £2,000 net but does not incur any costs that contain VAT. For computer and IT consultancy or data processing the fixed percentage is 14.5% – calculated on total income including VAT.

Net invoice £2,000

VAT at 20% £400

Gross invoice £2,400

FRS VAT due to HMRC at 14.5% (£2,400 * 14.5%) £348

Gain from using FRS (£400 – £348) £52

Share this:
linkedinlinkedin

Recent posts

  • Budget 2017
  • Autumn statement 2016
  • Tax efficient dividends and salary for directors for 2016/7
  • The Companies House confirmation statement
  • P11d dispensations
  • Budget 2016
  • Charging a business for mobile phone costs
  • Running a limited company

Follow Us

linkedinlinkedin

Our approach

Our philosophy is to keep things simple, talk straight and deliver value added financial solutions, tailored to your needs. We use the latest online accounting technology and take a proactive approach to supporting your business.

Find out more about us.

Technical blog

  • Budget 2017
  • Autumn statement 2016
  • Tax efficient dividends and salary for directors for 2016/7
  • The Companies House confirmation statement
  • P11d dispensations
  • Budget 2016
  • Charging a business for mobile phone costs
  • Running a limited company

Contact

Mobile: 07899 405500

Or complete our contact form.

Copyright© 2022 silver financial · all rights reserved · silver financial is a trading name of silver financial management limited · disclaimer · privacy