The FRS works on charging a set % VAT on your sales, according to your standard industrial classification code (SIC code).
The FRS was introduced in April 2002 to make accounting for small businesses much simpler.
When you invoice, you still charge 15% (the current VAT Rate until 31st December 2009, it then becomes 17.5% again) on your sales to your clients.
The Flat Rate %
The percentage rates were reduced in the pre-budget report on 1st
December 2008 and are set until the end of November 2009. In your first year on the FRS you also benefit from a further 1% reduction.
You can find what % your company would be according to its SIC code here, go to the end of the document and select the code that best fits your trade.
There are some restrictions that mean you may not qualify for the FRS:
- Turnover cannot be expected to exceed £150,000 taxable supplies in the next 12 months, or
- £187,500 if there is a mix of taxable and exempt supplies
- You cannot be an associate of another company or group of companies
- You cannot apply if you have been committed of VAT fraud
- You are not eligible if you always receive VAT repayments
Calculating VAT on Sales - Flat Rate Turnover
HMRC give detailed guidance on how to calculate your Flat Rate Turnover. It is the Flat Rate Turnover on which you should apply the Flat Rate %.
Your flat rate turnover is all the supplies your business makes, including VAT. This means all of the following:
- the VAT inclusive sales and takings for standard rate, zero rate and reduced rate supplies
- the value of exempt supplies, such as any rental income, bank interest on a business account or lottery commission. These examples are not exhaustive and you can find out more about exempt income in Notice 700 The VAT Guide.
- supplies of capital expenditure goods, unless they are supplies on which VAT has to be calculated outside the flat rate scheme in accordance with paragraph 15.9 and
- the value of any despatches to other Member States of the EC if you are making intra EC supplies. For details see Notice 725 The Single Market.
Note: As exempt and zero rate supplies are included in flat rate turnover you apply the flat rate percentage to the exempt and zero rate turnover. You may pay more VAT by being on the scheme if these supplies are a larger proportion of your business turnover than the average for your trade sector.
Please note: The Flat rate Turnover includes Bank Interest and supplies to EC countries without VAT charged, so if your bank interest is high or you supply services to EC Countries without VAT, you may be better not to use this scheme.
You must exclude in your flat rate turnover:
- Private income
- Sale proceeds from goods you own but which haven't been used in your business
- Any sales of gold covered by the VAT Act
- Non-business income and supplies outside the scope of VAT
- Sales of capital expenditure goods where you've reclaimed the VAT on their purchase
The Flat Rate Turnover includes the VAT charged on your sales, you then apply your Flat Rate % to the Turnover figure and this is the figure that goes in Box 1 and Box 3 of your VAT return.
You can calculate the Flat Rate Turnover on the basic (invoice and credit notes raised) or cash basis (what you have received and/or refunded).
Calculating the VAT on Expenditure
When calculating your VAT each VAT quarter you do not need to split out the VAT and net on expenditure items.
This means that when doing your book keeping you do not need to account for VAT on purchases, just on sales, so that can really make life easier.
If you have significant expenses that you recharge to your client or agency, you want to calculate that you are making a profit using the flat rate scheme as the input VAT is not reclaimable.
Whilst you are not reclaiming input VAT on expenditure, you may claim the VAT on any capital items with a net value of £2000 and over, so long as the asset is not to be 'used' up and written off within one year of its life. The VAT you can reclaim is the standard rate. This amount goes into box 4 of the VAT return.
Example Calculation
Sales of £10,000 of services + 15% vat = £11,500 Gross
Bank interest £100
Purchases of £1,500 as expenses
Using a Flat Rate of 11.5%
Box 1 £1,334 (£11,500 + £100=£11,600 x 11.5%)
Box 2 None
Box 3 £1,334
Box 4 None
Box 5 £1,334
Box 6 £11,600 (£11,500 + £100)
Box 7 £1,500
Box 8 None
Box 9 None
Flat Rate Scheme Profit
If your FRS % is 11.5% for example as an IT consultant then your company will be making 3.5% (4.5% in the first year) in profit just on VAT.
This 3.5% does actually appear as extra sales in your profit and loss account, and so you will pay corporation tax on the extra income.
HMRC provide specific guidance on IR35 and the Flat rate Scheme at BIM31585. If your company has income that is inside IR35 the Flat Rate Scheme Profit on the IR35 contract forms part of the deemed payment calculation and should be included in step 1 of the calculation.
Flat Rate Scheme Registration
If you are a new company and applying for VAT, you have the option of re-claiming input VAT on expenditure (including capital assets) up to three years prior to the company incorporation date. If you do have such expenses, it may be wiser to register on the cash accounting scheme and then change to the FRS after your first VAT return submission.
If you are already VAT registered you can change to the FRS at anytime as long as you fulfil the criteria. You can download an application form VAT 600 FRS , complete as a word document and email to frsapplications@hmrc.gsi.gov.uk
The HMRC website does have a ready reckoner
which will give you an idea of what extra your VAT liabilities will be and how much additional income you can expect to add to your profits. The link was not connecting at the time or writing this, but it has been reported!
There is also a National Advice Service line on 0845 010 9000
You can find full in depth information of the scheme on the HMRC website and there is a PDF to download which is HMRC Notice 733.