The Flat Rate Scheme (FRS) offers small UK businesses a simpler way to handle value-added tax (VAT). It aims to cut down on the paperwork that comes with standard VAT accounting making it a good choice for businesses that qualify.
With the FRS, companies pay HMRC (HM Revenue and Customs) a set percentage of their total sales as VAT. This method replaces the need to track and claim back VAT on every purchase. Businesses that don’t buy much VAT-taxable stuff compared to what they sell often find this approach helpful.
How does the Flat Rate Scheme work?
The Flat Rate Scheme works by using a set VAT percentage, which depends on the type of business. Companies that join the FRS don’t have to keep track of VAT on each sale and purchase. Instead, they use a set rate for their total sales and pay this to HMRC.
Let’s say a company’s sector has a 12% flat rate. If they make £100,000 in total sales over a certain time, they’d owe £12,000 in VAT (£100,000 x 12%). They’d pay this amount to HMRC, no matter how much VAT they paid on things they bought.
You can find a list of the various trade sectors and their flat rates on the HMRC website.
Benefits of the Flat Rate Scheme
- Lower paperwork load: The FRS makes VAT accounting easier, as companies don’t have to keep track of and get back the VAT on each buy. This can cut down on time and lessen the overall office work.
- Better money flow: With the FRS, firms pay a set share of their total sales as VAT, which can help to manage cash better. This helps businesses that have a small ratio of VAT-able purchases to sales.
- Possible tax cuts: Based on the type of business and the flat rate that applies, some companies might pay less VAT under the FRS than with the standard VAT accounting method.
- Easier record-keeping: The FRS’s simple nature helps businesses keep accurate financial records and follow HMRC’s reporting rules.
Disadvantages of the Flat Rate Scheme
- Limited VAT reclaim: The FRS stops businesses from reclaiming VAT on most purchases. This can hurt companies that buy a lot of VAT suitable goods compared to their sales.
- Chance of higher VAT payments: Some businesses might pay more VAT under the FRS than with standard VAT accounting. This depends on their trade sector and the flat rate that applies to them.
- Limited access: The FRS is open to businesses with yearly sales under £150,000 (not counting VAT), which might leave out some small and medium-sized companies.
- Rigid rules: After joining the FRS, businesses have to stay in it for at least a year, which can make it hard to switch back to the standard VAT accounting method.
Who can use the Flat Rate Scheme?
To use the Flat Rate Scheme, a business must meet these rules:
- The business’s yearly sales (not counting VAT) must be less than £150,000.
- The business can’t be part of a VAT group.
- The business can’t have links to another company that would push it over the £150,000 turnover limit.
- The business can’t have been kicked out of the FRS before because it didn’t follow tax rules.
How to sign up for the Flat Rate Scheme
To join the Flat Rate Scheme, you need to fill out and send a VAT1 form to HMRC. On this form, you should say you want to use the FRS. HMRC will look at your form and let you know if you can join. After they say yes, you can start using the FRS to do your VAT accounting.
Keep in mind that you need to stay in the FRS for at least 12 months, unless your business’s annual turnover goes over the £150,000 limit. If that happens, you’ll have to leave the scheme.
The Flat Rate Scheme vs Standard VAT Accounting
Your business’s specific situation will determine whether you should use the Flat Rate Scheme or the standard VAT accounting method. The FRS might benefit companies with a low ratio of VAT-able purchases to sales. It can make accounting easier and might save you money on taxes.
, companies with a high proportion of VAT-able purchases might benefit more from the standard VAT accounting method. This approach allows them to reclaim VAT on their purchases leading to lower overall VAT payments.
To figure out the best VAT accounting method for your business, you need to take a close look at your company’s finances and check out the applicable flat rates.
How to make the most of the Flat Rate Scheme
- Check your trade sector classification often: Make sure your business falls under the right trade sector. The flat rate that applies to you can affect how much VAT you pay.
- Keep track of your yearly sales: Watch your business’s yearly sales to make sure you can still use the FRS. If your sales go over £150,000, you’ll have to leave the scheme.
- Keep good records: The FRS makes VAT accounting easier, but you still need to keep good financial records to follow HMRC’s reporting rules.
- Think about when to join FRS: Based on your business’s money situation, it might help to join the FRS at the start of your accounting period. This can make the switch smoother.
- Get expert help: If you’re not sure if the FRS fits your business or have questions about how to implement it, it’s best to talk to a skilled accountant or tax expert.
To wrap up
The Flat Rate Scheme can help small UK businesses making paperwork easier, improving cash flow, and saving on taxes. But it’s crucial to weigh the good and bad points of the FRS and see how it stacks up against normal VAT accounting to find the right approach for your company.
By knowing who can qualify, figuring out VAT under the FRS, and putting smart plans into action, you can get the most out of the Flat Rate Scheme and make your business’s VAT accounting easier.
To find out more about how the Flat Rate Scheme can help your business, set up a meeting with our tax experts at Figures UK. We can give you advice tailored to your needs and help you choose the best way to handle VAT accounting for your company.
Jason Cannon
Managing Director and Figures UK Founder
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