The VAT Flat Rate Scheme for Small Businesses – a brief descriptionFor small businesses the Flat Rate Scheme (FRS) can be very useful as it simplifies the preparation of a business’s VAT return. Before you rush off to sign up for the FRS you should take a few moments to consider whether using the FRS will benefit your business. This scheme probably isn’t beneficial for businesses that apply the zero or reduced rate to most of their supplies.
How it works – in simple terms
You continue to raise invoices as normal, applying VAT at the appropriate rate. When you come to the end of the VAT period you use the total amount invoiced, i.e. the value plus the VAT, to work out how much VAT you owe to HMRC. You take this figure and apply the flat rate for your business. The answer is the amount of VAT you have to pay to HMRC.
What you don’t do is claim any VAT on general expenses as the flat rate has been set to take account of this. Where you make a major purchase you may be able to recover the VAT on the cost in addition to using the flat rate scheme. This only applies to capital items of more than £2,000.
Who cannot use the flat rate scheme?
The scheme cannot be used by businesses using:
* the Cash Accounting scheme – the FRS has its own cash accounting method.
* Retail schemes – the FRS has its own retail method.
* a margin scheme for second hand goods.
There are other reasons why a business might be excluded from the scheme. These are full details of these in HMRC’s guidance in Notice 733: Flat Rate Scheme for small businessesBusinesses that expect their turnover to exceed £150,000 (excluding VAT) in the coming twelve months aren’t allowed to join the scheme.Should you use it?The answer is: it depends! You need to weigh up what you would be paying to HMRC using the normal scheme and how much you would pay under the FRS. Many would expect to pay no more in VAT using the FRS or even paying less. Given the benefits, however, some might prefer to pay a little more as the savings in time and hassle might outweigh the cost of using the scheme.
HMRC very kindly provide a ready reckoner to help you work out whether you could benefit from using the scheme.
The biggest difficulty?
This would probably be deciding which flat rate to use. There is a table of the flat rates and the broad business area in the ready reckoner, and additional guidance to help you work out which description to use. It is important to get this right as if HMRC think you have got it wrong and paid too little VAT they’ll want to assess for the underpaid tax. Alternatively, if you set it too high and pay too much VAT, you are losing out.
Discount for new VAT registrations
Businesses in the first year of VAT registration get a 1% reduction on the flat rate they apply. This covers only the first year of the business’s VAT registration. If you are entitled to the discount there are two things to remember:
1. Apply the lower rate until the end of the first year of the business’s VAT registration; and
2. Apply the full rate after the end of the business’s first year of VAT registration.
Got a question on this article or just want to make a comment? Please leave it in the comments section below. I’d love to hear from you.
For small businesses the Flat Rate Scheme (FRS) can be very useful as it simplifies the preparation of a business’s VAT return. Before you rush off to sign up for the FRS you should take a few moments to consider whether using the FRS will benefit your business. This scheme probably isn’t beneficial for businesses that apply the zero or reduced rate to most of their supplies.
How it works – in simple terms
You continue to raise invoices as normal, applying VAT at the appropriate rate. When you come to the end of the VAT period you use the total amount invoiced, i.e. the value plus the VAT, to work out how much VAT you owe to HMRC. You take this figure and apply the flat rate for your business. The answer is the amount of VAT you have to pay to HMRC.
What you don’t do is claim any VAT on general expenses as the flat rate has been set to take account of this. Where you make a major purchase you may be able to recover the VAT on the cost in addition to using the flat rate scheme. This only applies to capital items of more than £2,000.
Who cannot use the flat rate scheme?
The scheme cannot be used by businesses using:
- the Cash Accounting scheme – the FRS has its own cash accounting method.
- Retail schemes – the FRS has its own retail method.
- a margin scheme for second hand goods.
There are other reasons why a business might be excluded from the scheme. These are full details of these in HMRC’s guidance in Notice 733: Flat Rate Scheme for small businesses
Businesses that expect their turnover to exceed £150,000 (excluding VAT) in the coming twelve months aren’t allowed to join the scheme.
Should you use it?
The answer is: it depends! You need to weigh up what you would be paying to HMRC using the normal scheme and how much you would pay under the FRS. Many would expect to pay no more in VAT using the FRS or even paying less. Given the benefits, however, some might prefer to pay a little more as the savings in time and hassle might outweigh the cost of using the scheme.
HMRC very kindly provide a ready reckoner to help you work out whether you could benefit from using the scheme.
The biggest difficulty?
This would probably be deciding which flat rate to use. There is a table of the flat rates and the broad business area in the ready reckoner, and additional guidance to help you work out which description to use. It is important to get this right as if HMRC think you have got it wrong and paid too little VAT they’ll want to assess for the underpaid tax. Alternatively, if you set it too high and pay too much VAT, you are losing out.
Discount for new VAT registrations
Businesses in the first year of VAT registration get a 1% reduction on the flat rate they apply. This covers only the first year of the business’s VAT registration. If you are entitled to the discount there are two things to remember:
- Apply the lower rate until the end of the first year of the business’s VAT registration; and
- Apply the full rate after the end of the business’s first year of VAT registration.
Got a question on this article or just want to make a comment? Please leave it in the comments section below. I’d love to hear from you.
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