The Flat Rate VAT scheme was introduced in 2002 and is available to all contractors and small businesses and is different to the standard VAT scheme. You are required to pay a percentage of turnover rather than paying VAT on the difference between sales and purchases. You are still able to charge clients the 20% VAT rate although, you will be paying the taxman a lower percentage meaning more income for your company. The percentage used differs between sectors.
What are the advantages?
The most important reason for joining the FRS for our clients is the additional savings that are made. This can effectively pay for your accountancy fees. This scheme provides many advantages such as simplifying VAT calculations and record keeping. This can be essential for smaller organisations that may lack accounting expertise. Furthermore, this benefit could potentially save money due to potential severe penalties that can be charged for errors. Another benefit contractors enjoy the most is that they are eligible to have a 1% reduction to their percentage in the first year of their VAT registration.
Here at Gorilla, most contractors use percentages between 11% and 14.5%. To give a few examples, our clients consist of engineers and IT consultants who are on a flat rate of 14.5% as well as Management consultants who have a percentage of 14%.
What are the disadvantages?
A disadvantage that small businesses and contractors will not usually have to worry about, is if your turnover is more than £150,000 per annum, you will be unable to take part in the scheme.
Negatives that will affect small businesses include not being able to reclaim VAT on purchases. Therefore, the FRS is most effective for those who have few expenses that have VAT compared to their fee income. VAT on expenses can only be reclaimed on capital items that cost £2,000 or more.
How do you apply for the FRS?
Changing tax programmes is very simple therefore applying for the Flat Rate Scheme is very easy as you can simply download an application form from the HMRC website and post it to them. This can start at the beginning of any VAT accounting period. If you need help with your VAT then choose Gorillas your VAT Accountants
Here at Gorilla, our contractor specialist accountants will provide professional advice on whether the flat rate scheme will benefit you. To find whether this will benefit you, call us on 0330 024 0406. Our all-inclusive accountancy package is at just £85 + VAT per month and includes unlimited support from your own dedicated accountant and can receive same day responses to any of your queries under our client service guarantee.
