Flat Rate VAT (FRV) – Is it for me?...

There is much talk about flat rate VAT or FRV for small businesses, but we are regularly asked how it works and what size or type of business should take advantage of it; so we thought it might be useful to give you a brief intro.

Who should use it?

  • Businesses with a GROSS (incl VAT) turnover of less than £230,000 in any one VAT year
  • Businesses with little or no direct purchases
  • SME’s that regularly work with other VAT registered businesses
  • Businesses with a lower turnover that want to appear larger than they are

What size businesses should use FRV?
Like any VAT scheme you can become VAT registered at any size; often this can help with your clients perception of you as a business. However, FRV has an upper turnover threshold and so this does mean that it can only be used by smaller businesses.

How does it work?
Unlike normal VAT, FRV only takes account of your revenue or sales figure, hence why it is good for those with little or no direct purchases. Instead of having to calculate the balance between your VATable income and expenditure, with FRV you only pay a single % of your total Gross sales value.

Whilst you charge VAT at the standard rate, you pay VAT at a lower rate which varies by industry. So for instance, is your FRV rate was 15% and you invoiced £100.00 + VAT, you would pay 15 % of the gross total (£120.00) making your VAT payment £18.00.

It is possible to make a profit on your VAT as the above example shows (charge £20.00, pay £18.00). This is totally legal and can be an added benefit of the scheme. FRV still has VAT quarters, is still run by HMRC and still carries the same penalties as a standard VAT scheme if you fail to comply.

Is it right for me?
It really does depend and we can very quickly ‘run some figures’ to work out if you qualify and what the likely impact would be on your business. If your revenue is consistently below the threshold above, then it is worth looking at.

However, if you are a stock based business or buy goods to sell on, the likelihood is FRV won’t work as well for you and you should use the Standard VAT scheme. Equally if you are a new business with significant growth plans and are likely to exceed the threshold in 18months – 2 years it may be easier to go directly to standard VAT.

Some of the benefits:

  • Like a normal VAT scheme, being VAT registered can give the perception that you are bigger than you actually are.
  • You can legitimately make a profit on flat rate VAT and class it as turnover

Some of the downsides:

  • It is a VAT scheme and you have to report to/pay HMRC accordingly. Whilst not onerous, it is another thing to do.
  • There is a ceiling of £230,000 of GROSS revenue (i.e. invoice value including VAT) which you must not exceed on FRV. This threshold is based on the year from the anniversary of your joining the VAT scheme, not your financial year, so if your VAT year does not coincide with your financial year, you may need to be extra vigilant.

If you would like to now more, please contact Nicki for a specific discussion about your business.

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