The Vat Flat Rate Scheme (FRS) has a beneficial advantage for many clients in that a financial gain can be made for very little effort.
Here’s how it works:
- If you are mainly working for commercial customers you can register for VAT under Flat Rate Scheme voluntarily, even if your turnover is below the VAT turnover threshold of £79,000 per annum. As long as your input Vat is relatively low (i.e. service companies and contractors), you can charge 20% to your customers but only pay a smaller percentage of the gross turnover to HMRC.
- For example a IT Contractor with a turnover of £50,000 would charge his customer 20% VAT and therefore receive £60,000.
- The additional £10,000 would be paid to HMRC, however under the Flat Rate Scheme only 14.5% of the gross turnover needs to be paid i.e. £60,000 x 14.5% = £8,700. Therefore an additional net income of £1,300.
When registering for Vat under the FRS HMRC allow a 1% discount during the first 12 months from date of VAT registration.
Further information on the Vat FRS and applicable rates for categories of business can be found at www.hmrc.gov.uk/vat/start/schemes/flat-rate.htm#5