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What Is VAT?

VAT Flat Rate Scheme (FRS)

What is it?

This is a special VAT scheme designed for contractors, freelancers and small businesses with turnover below £150,000. It allows you to still charge 20% VAT on invoices, but only pay HMRC back at a smaller percentage – depending on your business category.

Who is it for?

The scheme is great for contractors and freelancers as they typically have few purchases, and therefore really can make £1,000′s of extra profit each year.

A typical contractor can make additional profit between £1,500 and £4,000, possibly to use for your next holiday or a new car.

Who is it not for?

It is not for you, if you make a lot of standard rated purchases or if you have zero rated or exempt sales.

What are the advantages of the FRS?

  • Profit – our typical client makes between £1,500 – £4,000 a year of additional profit.
  • Simple – it is the easiest of all the VAT schemes to administer.
  • Cash – you can still use the cash scheme in conjunction with the FRS.
  • First year discount – for the first year you get a 1% discount on the Flat Rate Percentage.
  • Capital purchases – you can still claim VAT back on capital expenses such as computers.

How does it work?

You still charge VAT at the normal rate of 20% to your clients on your invoices, but you only pay over a smaller percentage (typically 10-14.5%) of the gross invoice amount to HMRC as part of your quarterly VAT returns.

Note, you will not be able to claim back VAT on purchases or expenses, unless they are for capital goods costing over £2,000 (such as computers and printers). Also, the £2,000 must be on one invoice alone, and not spread out across many.

An illustration of the potential profits:

If you take a typical example of an IT contractor, he would be on a flat rate percentage of 13.5% in his first year:

  • His Business has revenue of £100,000.
  • Hence, VAT he has charged and collected from his clients is £20,000.
  • His “gross” invoice values is £100,000 + £20,000 = £120,000.
  • Flat rate percentage of 13.5%.
  • VAT to pay over to HMRC = £120,000 x 13.5% = £16,200.

So his additional profit by being on the flat rate is £3,800, or £317 per month.

A good accountant can register you on the flat rate scheme and give you a personalised illustration.

Next: “The Flat Rate Percentages”
Any questions? Speak to one of our friendly accountants on 020 7969 2879.