Should You Use the VAT Flat Rate Scheme?
summary
- Simplified calculation by paying VAT based on a percentage of your sales.
- Tailored for small businesses with a turnover under £150,000.
- Limits VAT reclaim by restricting expense deductions.
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Our Guide on WHETHER you should use the vat flat rate scheme for your side hustle
Are you a small business owner or side hustle entrepreneur grappling with VAT complexities? The VAT Flat Rate Scheme (FRS) might be your streamlined solution. This article delves into how the FRS simplifies VAT calculations by applying a fixed percentage to your sales, offering a straightforward alternative to conventional VAT processes. Perfect for UK-based small businesses with a turnover under £150,000, the scheme not only simplifies VAT payments but also impacts how you reclaim VAT on expenses.
Read on to discover if this approach aligns with your business needs and how it can potentially ease your VAT management
Introduction to VAT Flat Rate Scheme (FRS)
The VAT Flat Rate Scheme (FRS) offers a different method of managing VAT to the
standard schemes. Instead of calculating VAT based on the difference between input VAT (on purchases) and output VAT (on sales), FRS allows businesses to pay VAT as a fixed percentage of their gross turnover. This scheme can simplify VAT accounting, making it an attractive option for eligible businesses.
Distinguishing FRS from Standard VAT
Standard VAT involves detailed record-keeping of VAT paid and charged, with businesses reclaiming or paying the difference to HM Revenue and Customs (HMRC).
FRS simplifies this by applying a uniform percentage to the business's turnover, reducing the administrative burden.
Example VAT FRS Calculation
Let's illustrate how the VAT Flat Rate Scheme (FRS) works with a practical example, focusing on a hairdresser's business.
Background:
- Turnover for a Quarter (3 month period): £60,000 (excluding VAT)
- VAT Flat Rate for Hairdressing: 13% (This rate can vary, so always check the current HMRC rates.)
Calculation:
- Calculate Gross Turnover (Including VAT):
- VAT is charged at the standard rate of 20% on sales.
- Gross Turnover = Net Turnover + VAT
- Gross Turnover = £60,000 + (20% of £60,000)
- Gross Turnover = £60,000 + £12,000 = £72,000
- Apply the VAT Flat Rate:
- VAT Due = 13% of Gross Turnover
- VAT Due = 13% of £72,000
- VAT Due = £9,360
Result:
- The hairdresser will pay HMRC £9,360 as their quarterly VAT bill under the FRS.
Key Points:
- The hairdresser doesn't need to account for VAT on each individual purchase or sale.
- Under the FRS, the hairdresser cannot reclaim VAT on purchases (except for certain capital assets over £2,000).
- If the hairdresser's customers are mostly non-VAT registered individuals (e.g., general public), using the FRS can be beneficial as they can charge VAT at the standard rate but pay HMRC a lower rate.
This simplified calculation demonstrates the potential financial benefit of the FRS for businesses like hairdressing, where purchases may not incur significant VAT. It's a straightforward way to handle VAT, but it's essential to weigh the scheme against your specific business expenses and needs.
VAT Payment under FRS
The percentage rate under FRS varies based on your business type and whether you're classified as a 'limited cost trader.' Limited cost traders spend a minimal amount on goods, defined as either less than 2% of their turnover or less than £1,000 a year. The specific rate for non-limited cost traders depends on their industry sector. For example, architectural services might have a different rate than retail businesses.
Reclaiming VAT in FRS
One of the key features of the FRS is that businesses typically cannot reclaim VAT on purchases, with certain exceptions like capital assets over £2,000. This differs from standard VAT, where businesses can reclaim VAT on eligible expenses.
Eligibility for FRS
Businesses can join the FRS if their expected VAT taxable turnover is £150,000 or less (excluding VAT). The scheme is generally available until the turnover exceeds £230,000. Businesses nearing this threshold should plan accordingly.
Joining the FRS
Joining the FRS can be done online during VAT registration or by submitting a VAT600 FRS form to HMRC. New VAT-registered businesses enjoy a 1% reduction in their flat rate for the first year.
FAQs
final thoughts
The VAT Flat Rate Scheme offers a streamlined approach to VAT accounting, potentially suitable for many small and medium-sized businesses. For tailored advice and assistance in managing your VAT obligations, contact a
Chartered Accountant.
BEFORE YOU GO...
Determining if the VAT Flat Rate Scheme suits your business is crucial, but it's only part of the VAT journey. Are you still pondering whether you need to register for VAT at all? It's a vital question every side hustler faces. Our next article, "Do You Need to Register for VAT? A Guide for Side Hustlers," is tailored to help you understand your VAT obligations. Whether you're just starting out or scaling up, we'll provide clear insights to ensure you're on the right track with VAT registration. Don't miss this essential read – it's your next step towards confident financial management for your side hustle.
sidehustles.co.uk one-minute podcast
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Should you use the VAT Flat Rate Scheme?
Welcome to the Sidehustles.co.uk One Minute Podcast. In the next 60 seconds, we're sharing a real-world insight from our network of seasoned side hustlers. This quick tip is designed to offer you practical advice that you can apply immediately in your side hustle journey.
Today's tip is from our latest article on the VAT Flat Rate Scheme – a must-know for small business owners. Even if you don't read the full article, this insight is crucial: When choosing between the standard VAT system and the Flat Rate Scheme, consider your business's spending on goods. The Flat Rate Scheme simplifies VAT calculations, but it limits your ability to reclaim VAT on purchases. If your business spends little on goods, this scheme could be a financially savvy choice, potentially saving you time and money on VAT calculations. However, if your business has significant goods-related expenses, sticking with the standard VAT might be more beneficial. This decision can have a substantial impact on your financial efficiency, so it’s worth considering carefully.
That's your one-minute real-world insight. Stay tuned for more!
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