Businesses can register to join the FRS scheme where turnover is expected to be less than £150,000 (excl VAT per annum). You can register voluntarily where your turnover does not exceed the current £82,000 threshold and take advantage of the Flat Rate Scheme.
There are different FRS rates depending on the nature of trade.
The following is an example of how the Flat Rate VAT scheme would work for an IT Consultant. If turnover is £90,000 then VAT would be charged to customers at the standard rate of 20% – £18,000. In the first year of being registered for the FRS scheme, the business would pay 13.5% of sales plus VAT to HMRC – £108,000 x 13.5% = £14,580.
Therefore, the year 1 FRS profit is £3,420 (VAT Collected less VAT Payable – £14,580).
| IT Consultant | ||||||
| FRS Rate | 14.50% | |||||
| FRS Rate Year 1 | 13.50% | |||||
| Annual Sales Excl. VAT | £50,000 | £70,000 | £90,000 | £110,000 | £130,000 | |
| VAT Charged to clients @ 20% | £10,000 | £14,000 | £18,000 | £22,000 | £26,000 | |
| Sales plus VAT (Gross) | £60,000 | £84,000 | £108,000 | £132,000 | £156,000 | |
| Vat Payable (year 1) @ 13.50% | £8,100 | £11,340 | £14,580 | £17,820 | £21060 | |
| FRS PROFIT | £1,900 | £2,660 | £3,420 | £4,180 | £4,940 |
The Flat Rate Scheme Profit for year 2 and subsequent years would reduce to £2,340.
Xero, the online accounting system, manages FRS VAT accounting and FRS Cash Accounting.
Please note the business will not be able to reclaim VAT on expenses such as accounting fees. The FRS scheme rate already incorporates this.
Any capital Expenditure in excess of £2,000 would be eligible for VAT recovery, but there are important rules to comply with.
Tips
- There is a VAT Cash Scheme where you only pay VAT you have collected from your clients.
- You have to compare this to claiming back VAT on your purchases. If you have a lot of VATable purchases then it may not be worth registering for the flat rate scheme.
- Flat rates do vary from 4% to 14.5% so this calculation should be used as a guide only and reworked for the rate specific to your industry and your circumstances.
- You can find out the rate for your industry at the HMRC web site, Flat Rate Scheme guide or contact us for more information.
- In your first year of operating the scheme you can reduce the flat rate percentage by a further 1%.
- Once you join the scheme you can stay in it until your total business income is more than £230,000.
- Your VAT taxable turnover is the total of everything that you sell during the year that is liable for VAT including standard, reduced rate or zero rate sales or other supplies
- ‘Profit’ made on the flat rate scheme is subject to corporation tax
If you need any guidance specific to your business, then please feel free to get in touch.
