Flat Rate Scheme

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In the Know: The Flat Rate Scheme Explained

Last updated on Wednesday, October 15, 2014

Written by Churchill Knight

The Flat Rate Scheme is a VAT option a business or company can opt into to determine the way in which they pay VAT back to the HMRC and more importantly, how much they have to return.

The Explanation

Please read about New Flat Rate Scheme Changes 2017

If you are a business or company on the scheme you will be required to raise invoices at the standard VAT rate (currently 20% in 2014) however depending on the sector of work you are involved within, the rate of VAT to return to the HMRC will differ. A few examples;

Business Category Percentage
Financial services 13.5%
Management consultancy 14%
Secretarial services 13%
Social work 11%
IT consultancy 14.5%

To view the full list of business categories and appropriate VAT return percentages please click here.

The Qualifiers

In order to be able to register for the Flat Rate Scheme you must NOT associate yourself with any of the below points;

  1. Your estimated VAT taxable turnover (excluding VAT) in the rolling 12 months will be more than £150,000
  2. You were in the scheme and left during the previous 12 months
  3. You have been convicted of a VAT offence or charged a penalty for VAT evasion in the last year
  4. Your business is closely associated with another business

Once you join the scheme, you can stay registered until your business income reaches £230,000.

The Maths

Edward is an IT Consultant. He invoices his client for £4,000 through his Limited Company, the VAT charged on top of this is £800 (standard VAT rate of 20%) therefore his total gross invoice including VAT is for £4,800.

Being an IT Consultant, Edward falls into the 14.5% bracket for the Flat Rate Scheme. This ultimately means that Edward will need to pay 14.5% of £4,800 as VAT to the HMRC.

£4,800 x 14.5% = £696

£800 – £696 = Edward’s FRS bonus

Furthermore, there is also an extra incentive from the HMRC for people to join the scheme by giving an extra 1% off in the first year. Therefore, Edward will be paying 13.5% VAT on the gross income in the first year. Please note that this 1% reduced rate is effective from the date of VAT registration, not the date of the FRS registration.

It is important to remember that any profit received as a result of being on the Flat Rate Scheme is deemed as taxable income and will need to declared and paid tax upon.

The Considerations

Although in some cases the Flat Rate Scheme allows businesses or companies to keep a percentage of the VAT received from a client and therefore contribute to overall profit, the scheme may not suit everybody. The single most important element to consider is whether or not you are subject to many VAT chargeable expenses.  A business or company who is registered with the FRS scheme is exempt from reclaiming VAT on chargeable expenses and therefore may lose out over the long term.

Another downside could be where the company is invoicing exempt invoices, the company would still have to pay VAT even when it is not charging the end clients.

*Please note that this blog was published in November 2014 and threshold amounts are subject to change by the HMRC on a regular basis.

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