There are many abbreviations used on a daily basis that you’ll immediately know the meaning of. For example, you’re likely to reply to something ending in RSVP or prioritise something with an ASAP request. But do you know what is meant by the string of letters: FRS?
If you don’t, don’t worry. You’re not alone!
What Does FRS Stand For?
FRS stands for Flat Rate Scheme and, as a contractor, this is something you may well be able to benefit from.
The Flat Rate Scheme for VAT can make your VAT accounting a whole lot simpler and could save you money.
So How Does It Affect My VAT Payments?
As you may be aware, standard VAT accounting means you pay HMRC the difference between the VAT you charge your customers and the VAT you pay out on purchases.
The Flat Rate Scheme however, means you are no longer able to claim back the VAT on purchases (although you may be able to on capital assets worth more than £2,000). Instead, your VAT payments are calculated as a fixed percentage of your total VAT inclusive turnover.
So, you would still charge the current VAT rate (20% as of 2011) on your invoices, but would pay HMRC only a portion of your VAT inclusive turnover.
The flat rate percentage depends on your business sector and you should choose the one that best describes your main business activity for the coming year.
A full list of categories can be found online at: http://www.hmrc.gov.uk/vat/start/schemes/flat-rate.htm, but some examples include:
Accountancy – 14.5%
Computer and IT Consultancy or Data Processing – 14.5%
Management Consultancy – 14%
Social Work – 11%
So, if your main business sector was social work, you would pay the flat rate percentage of 11%
Net amount invoiced to client: £1,000
VAT charged (at 20%): £200
Total Gross Amount: £1,200
Flat Rate: 11%
VAT Due to HMRC: £132 (11% of £1,200)
Can Everybody Join the Scheme?
No, not everybody is entitled to join the Flat Rate Scheme.
In order to be eligible to join, your estimated VAT taxable turnover in the next year cannot exceed £150,000 (Note: VAT taxable turnover is the total of everything you sell during the year that is subject to VAT)
There are a number of reasons you will not be allowed to join the scheme too. Some examples include:
-if you’ve been a part of the Scheme and left during the previous 12 months or
-if you’ve been convicted of a VAT offence in the last year
Further reasons can be found online at: http://www.hmrc.gov.uk/vat/start/schemes/flat-rate.htm
What Are The Benefits Of Me Joining?
Benefits of the Scheme include:
-may save you money
-less hassle as you don’t have to record the VAT charge on every sale and purchase you make
-less rules to follow as you don’t have to work out what purchases you can/cannot claim VAT on
-you will know exactly what percentage of your takings you will need to pay the Revenue
-there’s a first year discount! Yes, HMRC are offering a discount! For the 1st year of your VAT registration, you will get a 1% reduction on your FRS % until the day before the 1st anniversary you became VAT registered
So For What Reasons Wouldn’t I Join?
The scheme might seem like you have nothing to lose but, before you do decide to join, you should ask yourself if it’s going to actually benefit you.
Some things you should ask yourself include:
-do I regularly receive a VAT repayment under standard VAT accounting when I do my return?
-do I make a lot of zero-rated or exempt sales?
If you answered yes to any of the above, the Flat Rate Scheme may not be of financial benefit to you and you may decide you’re better off sticking with standard VAT accounting
Can I Join and Leave at Any Time?
You can join the Flat Rate Scheme at the beginning of any VAT accounting period (presuming you are eligible to do so) and you can leave the scheme at any time.
Usually you would leave the scheme at the end of your next VAT accounting period, but HMRC will confirm the leaving date in writing once you have informed them you want to leave.
For further information on the Flat Rate Scheme, visit: http://www.hmrc.gov.uk/vat/start/schemes/flat-rate.htm
Alternatively, contact us to discuss any queries you may have on 0203 5827 122 or email Info@1ca.co.uk