The Flat Rate Scheme (FRS) was introduced by HMRC to help simplify VAT accounting for SME’s and it can be particularly advantageous to contractors.
You can join the Flat Rate Scheme if your sales are less than £150,000 in year 1 (a day rate of around £620 per day).
The Flat Rate Scheme works by applying a Flat Rate Percentage to your gross sales. These percentages differ depending on what trade your company undertakes however the most common ones we see are currently:
Each quarter, we total the sales you have made in the previous 3 months and multiply this by the relevant Flat Rate Percentage. This amount is reported on a VAT Return and the amount paid over to HMRC.
Any difference between the VAT added onto sales and the amount paid over is retained in the company as profit – which means more is available funds to be paid to you as dividends!