Is it costing you money to be VAT registered?
Flat Rate VAT Scheme rules have changed
If you are charging VAT when you don’t need to:
- Is this putting your business at a competitive DISADVANTAGE
- Is it costing you money
- Is it causing unnecessary administration
The VAT flat rate scheme (FRS) was set up as an incentive provided by the Government to help small businesses. When it was established many years ago it was intended to help by simplifying VAT. Up to 01 April 2017 FRS was recommended to help most small businesses.
What changed? In April 2017 an additional higher flat rate was applied to businesses in ANY sector if they have “limited costs”. It is unlikely that most small business, particularly service businesses, will benefit from FRS any longer.
- If your competitors are not charging VAT then they can charge 20% less than you and put you at a competitive disadvantage (where your customers are not VAT registered).
- If you are working though a medical agency that won’t pay VAT then it is costing you a lot of money. Or maybe it is causing you to lose out on contracts.
- If your VAT turnover (broadly your businesses VATABLE income) is less than £85,000 (currently) you don’t NEED to be VAT registered.
Up until April 2017 most small businesses were advised to register for VAT and use the VAT Flat rate Scheme (FRS). Due to the change in legislation you should at least have been advised to reconsider this. This applies to contract workers as well as general businesses.
See the examples below to understand how you could be losing out.
What is the FRS and how does it work
The amount of VAT a business pays or claims backs from HM Revenue and Customs (HMRC) is usually the difference between VAT charged by the business to customers and the VAT the business pays on their own purchases.
FRS is an incentive provided by the Government to help simplify taxes and up to 01 April 2017 was recommended to help most small businesses. Using FRS your business / company will still charge VAT on your invoices at the appropriate rate, normally 20% but only pay VAT over to HM Revenue and Customs at a lower rate.
Key points about FRS:
- You pay a fixed rate of VAT to HMRC depending on your trade
- You keep the difference between what you charge your customers and pay to HMRC
- You can’t reclaim the VAT on your purchases – except for certain capital assets over £2,000
- To join the scheme your VAT turnover must be £150,000 or less (excluding VAT), and you must apply to HMRC
The rate your business pays varies depending on your profession or trade. Up until 01 April 2017 this was particularly advantageous for most businesses as for example a “general” business paid over VAT at a rate of 12% (but there are specific rates for each trade.) In addition the rate in the first year of VAT registration is reduced by 1%.
Some example VAT Flat Rates include:
- Advertising 11%
- Architect, civil and structural engineer or surveyor 14.5%
- Computer and IT consultancy or data processing 14.5%
- Transport including couriers and freight 10 %
The change made as of 01 April 2017 was to introduce an additional flat rate of 16.5% which applies to businesses in ANY sector if they have “limited costs”. A limited cost business is one where the cost of goods is below 2% of turnover or below £1,000 each year. The “cost of goods” excludes services and travel etc. So it is unlikely that many smaller businesses, including most small service business, will be eligible for the lower rate any more.
And this is how FRS works. Your business must still record your expenses, but you do NOT have to calculate VAT on expenses, as the VAT element is allowed for in the reduced flat rate VAT the business pays to HMRC. Also if your company purchases a capital asset for more than £2,000 you can additionally claim back the VAT on this.
Where appropriate the business will charge the standard VAT rate on your invoices, currently 20%. However rather than taking the VAT on every invoice and accounting for this quarterly, your company will only pay a single flat rate percentage on your turnover each quarter (including the VAT – see examples below).
Like standard VAT, the flat rate scheme still requires you to complete a quarterly VAT return form (online only).
If you are NOT a limited cost trader the VAT percentage you pay is considerably lower than that of the standard VAT rate you then keep the difference as additional income.
Examples:
Unless your business is NOT a limited cost trader, we would not generally recommend that your business registers for VAT if your turnover is below the registration threshold. If you do have costs that include VAT then consider registering for VAT but not on FRS.
For further advice existing clients email us at support@anytime.uk.com or call 03333 110 230
For new enquiries contact us now
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