Flat Rate Scheme — A Gift To Small Businesses?


I’ve always recommended the ‘Flat Rate Scheme’ (FRS) to my friends who have small businesses offering digital services.

On the face of it the FRS may seem to be a quick tip to boost your profits; but it’s not as simple as that. In my opinion, it mainly benefits small businesses or sole traders who offer a digital service such as Web Development or Designers as these tend to have smaller VAT deductible overheads.

The Way It Works:

Send your invoices with the 20% VAT added. When you pay your VAT bill you will pay a % of the gross amount of turnover — the % you pay depends on your business sector.

Example:

• Invoice amount — £1000
• VAT — £200
• VAT inclusive invoice — £1200
• Flat Rate VAT to be paid (At 10%) — £120
• Business income — £1080

In this instance it would appear as though the business has made an additional £80 from this invoice just for being on the FRS. Just think, if the gross yearly turnover was £100k then you will have just added a further £8K to your pocket.

Limitations:

If you are on the FRS you cannot claim back VAT for purchases so you MUST take this into consideration; if you do spend a lot on buying stock or services it may not be beneficial for you. (Except on capital expenditure over £2000)

Eligibility:

You can join the FRS if you expect your annual turnover to be less than £150,000.

You will need to leave when your business turnover exceeds £230,000.

I am not a qualified accountant so make sure you contact yours and weigh up the pros and cons before moving to the Flat Rate Scheme.

For more information on the Flat Rate Scheme visit https://www.gov.uk/vat-flat-rate-scheme

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