The FRS is intended to make bookkeeping simpler for small businesses by allowing them to apply a flat rate percentage to total quarterly sales including VAT. Depending on the type of business it can save money although the scheme was not introduced for this purpose. Nicola Roby, Director at CHW Small Business accounting explains if the scheme can benefit SMEs.
VAT is charged to customers and paid to suppliers as normal but when it comes to preparing the return and paying VAT rather than adding up the VAT charged and deducting the VAT which can be reclaimed, if you are on the FRS, you use a different method.
You add up your sales, including VAT charged, then calculate a percentage of this and that is the VAT you pay to HMRC. The percentage used is set by HMRC depending on the nature of the business. You don’t reclaim VAT on purchases, other than if you have bought a capital asset costing £2,000 or more including VAT.
You can’t just start using the scheme. You have to apply to HMRC. Some businesses are not eligible and HMRC will refuse entry if you have been guilty of a VAT offence or been charged a penalty for evading VAT within the previous 12 months.
Whilst the simplicity of the FRS makes it attractive, it is not suitable for all businesses and you should consult your accountant before applying to join.
Businesses which are already in the scheme can’t back date leaving and should consider whether it is financially sensible to remain as they can only opt out from the start of the current quarter.
For more advice on whether or not the flat rate scheme could benefit your business, click here to contact us at CHW small business accounting.
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