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The Flat Rate Scheme
It may not be simple, but it could save you VAT, says Mark Thomas. HMRC advertises its VAT flat rate scheme (FRS) as a means by which you can make your record keeping more straightforward (as well as simplifying its own administration). What it does not tell you is that there are quite a few complex rules to contend with. Is it worth signing up to or not?
Any business can apply to HMRC to use its flat rate scheme (FRS) as long as its annual turnover is less than £150,000. While you can only join the scheme where your turnover is less than £150,000, you don’t have to leave it until it exceeds £230,000 – and being in the scheme can be quite lucrative, because of the potential VAT savings.
Businesses in the FRS charge their customers VAT in the normal way. But, whilst you charge VAT in the usual manner, how much you pass back to HMRC is worked out very differently. Firstly, you must choose from HMRC’s 55 trades the one that best describes your business. Each trade has a percentage associated with it, which is used to calculate how much of the VAT is payable to HMRC. (The idiosyncrasies are too many and varied to go into here – suffice to say that, if you feel that FRS may be right for you, you should have a detailed discussion with us.)
If you choose the wrong trade, you may either pay too much VAT and thus lose money, or pay too little and leave your business open to future investigation, a large bill and penalties. HMRC has a VAT helpline (0300 200 3700) for advice.
Whilst we do take issue with HMRC’s contention that the FRS is a simplification, we recommend considering it, because it can save you VAT.
If you would like to discuss whether being in the FRS would be beneficial to your business, please talk to your usual Thomas Croft contact as soon as possible.