How the flat rate scheme works
The scheme was set up by HMRC to make VAT easier for everyone.
Instead of having to work out and record VAT on individual transactions, one fixed-rate of VAT is applied to your gross turnover. Each sector of work type has been assigned its own rate by HMRC and payments are expected on a quarterly basis.
Is it really worth that much of a saving?
It all depends on the type of business you run.
HMRC have categorised each ‘Trade’ into ‘Sectors’ and each sector has its own fixed VAT percentage. The range is wide from 4% to 14.5%. Here are 2 examples:
VAT flat rate scheme v Standard VAT example
Tony is a self employed construction worker and his vatable turnover is £110,000 a year.
Expenses: His only business expense for the year is his accountant at £500.
Standard VAT example
Using the standard VAT process
Output VAT £110,000 x 20% = £22,000
Input VAT reclaimed on expenses £500 x 20% = £83
VAT due to HMRC £21,917
VAT flat rate scheme example
Under the flat rate scheme the VAT percentage for his industry is 14.5%
£110,000 + VAT = £15950 x 14.5% = VAT due to HMRC £15950
Total saving under the VAT flat rate scheme £5967
What can I claim for under the FRS
Being in the VAT flat rate scheme means you don’t reclaim VAT on your purchases ( unless it’s an Asset worth £2000 including VAT ). What you reclaim is the percentage difference between the standard rate of VAT and whatever the rate is for your industry. If you have not registered for VAT in the past you can claim back any allowable assets bought within the last four years in your first VAT return ( even if they are worth less than £2000 including VAT ).
Do I need to fill in a VAT return?
Yes. A VAT return will need submitted at the end of each quarter. You can also de-register from VAT at any point. We can help you register, submit VAT returns and deregister as part of our service.