What is the Flat Rate Scheme?
The Flat Rate Scheme (FRS) is a simplified VAT accounting scheme aimed at smaller businesses who are less likely to have time to wrestle with burden of standard VAT accounting.
It is aimed at businesses with a turnover of £150,000 or less (excl. VAT). Once on the scheme a business total VAT inclusive turnover may increase to £230,000 before it will be required to leave the FRS.
Flat Rate Scheme users are required to calculate VAT due in any particular VAT period by applying a single industry specific r flat VAT rate to their total turnover.
What are the advantages of the Flat Rate Scheme?
In simple terms, you do not have to total all the VAT on your invoices and deduct input tax from output tax to establish the VAT due figure. The sector VAT flat rate is designed to do this work for you and broadly it is in the right ballpark.
Newly VAT registered businesses are permitted to knock a further 1% of their sector VAT rate during their first year of VAT registration.
Are there any disadvantages?
The FRS works best of simple businesses that make taxable supplies. As the VAT due is calculated by reference to total turnover this scheme does not really hold any advanctages for businesses that make exempt of zero rated supplies. Also businesses that are involved in multiple sectors may be disadvantaged if their main activity flat rate is higher than that of their subsidiary activities.
Limited Cost Traders
When it was first introduced the FRS proved incredibly popular with self-employed contractiors with very little in the way of direct costs / overheads. Many found a real VAT saving in the use of the FRS. Others used the Flat Rate Scheme as a deliberate tax planning device. In 2016, the government acted to nullify such savings. Now businesses with limited costs are requied to use a Flat Rate % of 16.5% in any period in which their costs are less than 2% of their turnover.
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