The Flat Rate VAT Scheme

8 years ago by Oliver Atkinson

Using standard VAT accounting, the VAT you pay to HMRC or claim back from them is the difference between the VAT you charge your customers and the VAT you pay on your purchases.

The Flat Rate VAT Scheme (FRS) allows you to charge your customers VAT at the full rate as normal, but pay a lesser amount to HMRC. The amount you keep is a fixed percentage set by HMRC and depends on your type of business (for example the rate is 6.5% for Pubs). In exchange you have to give up your right to reclaim VAT on some of your purchases.

Joining The Scheme

The FRS is aimed only at small businesses, but because larger ones often start their life small, new companies shouldn’t dismiss using the FRS for a limited period. You can join the FRS where your estimated taxable turnover (including standard, reduced rate and zero rated sales), excluding VAT, in the next year will be £150,000 or less.

When To Join

There’s an incentive for joining the FRS as soon as you register forVATbecause the rules allow you to keep a larger amount of theVATyou collect from your customers. There is a 1% reduction in the flat rate percentage for the first year of registration. So, for example, if your first year’s VATstandard-rated turnover in the scheme is £140,000, you’ll save £1,680 ((£140,000 + 20%) x 1%).

Purchasing Capital Goods

There is an exception to the basic rule which says you can’t reclaim VAT on purchases. Where you spend £2,000 or more on a capital asset, you can recover the VAT you’ve paid from HMRC. For example, if you bought a computer for £1,000 you wouldn’t be allowed to reclaim the VAT, but if it cost £2,000 you would.

You can group purchases made from the same supplier at the same time. So if you bought a printer costing £1,200 (VAT inclusive) together with the computer, you could reclaim VAT on the lot.

Goods On Hand At Registration

Subject to time limits (4 years prior to registration for goods and assets still owned by the business at registration and 6 months for services), a business can reclaim VAT on goods and certain services bought before it registers, as long as these are still on hand in their original form at the time of registration. For example, a restaurant owner can claim the VAT back on alcohol he has in stock when he registers.

Where you intend to register and join the FRS, buy your stock and capital assets costing less than £2,000 before registering.

Leaving The Scheme

Once in the scheme you can stay until your total annual business income including VAT for the previous year is more than £230,000. Business income includes not only sales but also all other income such as interest from a business account or sale of a business premises. You must also leave the scheme where you are certain that your business income will exceed £230,000 in the next 30 days.

If you need help switching to the Flat Rate VAT scheme, get in touch with our London or Hove accountants.