Normal scheme is where VAT is collected on company sales @ standard rate of VAT (currently 20%) and pay this across to the Customs & Excise less the VAT that your company has incurred on its expenses.
FRS (Flat Rate Scheme)is where VAT is collected on company sales @ standard rate of VAT but pay across to the Customs & Excise at a given rate on the gross turnover ie sales value + VAT (eg 14.5% for IT Consultants with reduction to 13.5% in the first year).There is no allowable deduction for input tax on expenditure (except for capital items over £2000).
The FRS aims to simplify VAT Accounting for small businesses. The scheme is available to most businesses whose taxable turnover (excluding VAT) is expected to be less than £150,000 in the next 12 months and total business income less than £187,500. The scheme can continue to be used until VAT inclusive annual turnover exceeds £225,000.
Your accountant will be able to help determine if it’s beneficial for you to apply for the VAT FRS.
Examples
- With sales of £150k per year and vatable expenses of £8k per year, there is a saving of roughly £2,300 per year to operate the FRS.
- With sales of £70k and vatable expenses of £8k per year, there is a saving of £220 per year.
- With sales of £70k and vatable expenses of £4k per year, there is a saving of £1,020 per year.
- With sales of £50k and vatable expenses of £4k per year, there is a saving of £500 per year.
Majority of Contractors working through their personal service company benefit from being on the VAT Flat Rate Scheme and save anything between £1k-£4k per year on VAT.
Further information on the VAT Flat Rate Scheme together with FRS industry sector percentages can be found at: http://www.hmrc.gov.uk/vat/start/schemes/flat-rate.htm
If you have any questions, please contact us.