The Taxman extols the virtues of the time and admin savings you can make by using his flat rate scheme (FRS), but he’s keen to play down some of the VAT savings it offers. What are these and when can you take advantage of them?
We’re sure you’ve heard of the VAT flat rate scheme (FRS), but just to recap on the basics, it allows you to charge your customers VAT at the full rate, but pay a lesser amount to the Taxman. In exchange you have to give up your right to reclaim VAT on some of your purchases. The Taxman’s theory is that this is broadly cost neutral for businesses, but in practice there are several more obscure FRS rules you can use that might save you hundreds, or possibly thousands, of pounds.
Joining the scheme – size matters
The FRS is aimed only at small businesses, but because larger ones often start their life as small fry, new companies shouldn’t dismiss using the FRS for a limited period. Where you have a reasonable expectation that your business turnover, excluding VAT, won’t exceed £150,000 for the next year, you can join the FRS. But the rules for leaving the scheme mean that you can stay in it longer than you might think.
Sapphire Tip. You don’t have to leave the FRS as long as your turnover for the previous year doesn’t exceed £230,000 including VAT.
Join early to avoid disappointment
There’s an incentive for joining the FRS as soon as you register for VAT because the rules allow you to keep a larger amount of the VAT you collect from your customers: 1% of your VAT-inclusive turnover to be precise. So, for example, if your first year’s VAT standard-rated turnover in the scheme is £70,000, you’ll save £840 ((£70,000 + 20%) x 1%).
Grouping purchases of capital goods
If you’re familiar with the FRS, you probably know there’s an exception to the basic rule which says you can’t reclaim VAT on purchases. Where you spend £2,000 or more on a capital asset, you can recover the VAT you’ve paid from the Taxman. For example, if you bought a coffee machine for £1,000 you wouldn’t be allowed to reclaim the VAT, but if it cost £2,000 you would.Sapphire Tip. You can group purchases made from the same supplier at the same time. So if you bought tables and chairs costing £1,200 (VAT inclusive) together with the coffee machine, you could reclaim VAT on the lot.
If you use the FRS, you don’t have to leave the scheme unless your annual turnover exceeds £230,000. For most businesses, this will generate a saving (or a “gain”) of 3.5% of turnover. Where you join the FRS at the same time as you register, you’ll cut your VAT bill by 1% for a year.