The flat rate VAT scheme was designed by the government to simplify the VAT system, making it easier for contractors and freelancers to manage the collection and payment of VAT to the government. The basic idea is that you collect VAT on your invoices at a rate of 20%, and then pay it on to HM Revenue and Customs (HMRC) at a lower rate. The repayment rate varies depending on the industry in which you work – however this part of the scheme has caused some confusion due to the wording of the guidance.
HMRC previously noted that all consultants should, whether they are in health and safety, employment, or marketing use the category “management consultants”, however further on in the advice confusion is caused with the statement “all engineering consultants and designers should choose the category for “architect, civil and structural engineer or surveyor” -but with amendments made earlier this month businesses who do not describe themselves as management consultants are free to choose the category “business services not listed elsewhere”. These changes will allow a number of businesses to take advantage of the lower rate resulting in quite significant savings.
Contractors who are eligible for the flat rate VAT scheme could make some significant savings, because the Flat Rate Scheme (FRS) offers this level of savings, it is popular amongst contractors, interim managers, freelancers and other independent professionals. It is also recommended by most accountants for clients who don’t have many VAT chargeable transactions.
Important points to note about the Flat Rate VAT Scheme:
– Any business who expects their turnover before VAT to be more than £150,000 should not join the scheme.
– If your annual turnover is likely to be more than £230,000 including VAT in subsequent years, then you must leave the scheme.
– If you join the FRS, you will not be able to claim any VAT back on business purchases or expenses, but it is possible to claim VAT back on capital assets where the total bill has been more than £2,000. You can claim for a selection of items, which adds up to this sum, but they must all be purchased at the same time and shown on the same receipt in order to qualify to reclaim VAT in these circumstances.
– As with normal VAT registration, you will need to complete a quarterly VAT return, which is only available for online submission. You will have to charge your customers and clients VAT at the prevailing rate (20% in 2014) and then simply pay a flat rate of VAT on your entire turnover when you complete your quarterly return, rather than accounting for the VAT on every individual invoice.
Enrolling for the scheme:
Joining the flat rate VAT scheme is simple. A company can enrol online when they register for VAT. Or they can complete the VAT600FRS form and send them to the relevant tax offices by post. Confirmation that a business has joined the scheme is sent online or via post.
How does it work?:
Before you join the scheme you have to check the VAT rate for the sector in which your business operates. Once in the scheme you pay a flat rate percentage on your gross turnover to HMRC.
What are the Advantages of using the Flat Rate VAT Scheme?
-The primary advantage of the scheme is that it makes VAT accounting much simpler for SMEs
-It can cut down time on the administration burden of bookkeeping
-You pay discounted VAT to HMRC although you charge your clients 20% VAT
-You know precisely what your VAT outgoings will be each month
-In your first year as a VAT registered business your VAT rate is reduced by 1%
-The flat rate VAT scheme means there is less of an opportunity for accounting errors by SMEs.
Are there Disadvantages of using the Flat Rate VAT Scheme?
– If the nature of your business means that you buy in a lot of stock or have high rates of chargeable expenses, then you could lose out by not claiming the VAT back on these transactions.
If you have any questions about VAT, the Flat Rate Scheme and whether or not it is suitable for you, don’t hesitate to contact us.