Flat Rate VAT Scheme – a freelancer's guide

What is the Flat Rate Scheme (FRS)?

The Flat Rate VAT scheme was introduced in 2002 and is available to all small businesses or sole proprietorships. The FRS differs from standard VAT accounting as you pay a percentage of turnover rather than paying VAT on the difference between sales and purchases. So, while you continue to charge clients the recently introduced 20% VAT rate, you can potentially give a smaller percentage to the taxman. The FRS rate differs from sector to sector.

What are the advantages of the FRS?

The FRS helps to simplify VAT calculations and record keeping. This is particularly helpful to smaller outfits that may not have the time or expertise to conduct their accounting in the traditional way (and, bearing in mind the increasingly severe penalties that can be charged for errors, this can only be a good thing). It shortens the process, removing the need to keep a record of VAT charged for each individual sale or that paid on purchases. However, you do still need to show a VAT amount on each sales invoice.

It might also save you money. Example:

Standard VAT Calculation

Total Billings £50,000
Output VAT 20% £10,000
Total invoiced £60,000
VAT reclaimed through purchases £750
Total payable to HMRC £9,250

Flat Rate Scheme Calculation

Total Billings £50,000
Output VAT 20% £10,000
Total invoiced £60,000
Total payable to HMRC at 14.5% of T/O £8,700

In addition, if you are in your first year of business you can benefit from a 1% reduction to your FRS rate.

Who stands to benefit from the FRS?

Largely freelancers are likely to benefit from the scheme, though this depends on turnover and expenses as the higher your sales turnover, the more likely it is to be beneficial.

Whilst the rates increased on January 4 2011, reducing the possible profit made, there are still many people who could benefit.

The rates alter depending upon your business, ranging from 4% to 14.5%. For those working in Entertainment and Journalism the rate is 12.5%; for those in Advertising it is 11 % (as it is for Photographers), while for Architect is 14%. For computer freelancers, the rate is 14.5% (see the calculation above for an example).

These rates took effect from January 4 2011 and are in force until further notice. You can visit the FRS page on HMRC's website to find out your flat rate.

What are the disadvantages?

There are rules and exceptions governing the Flat Rate Scheme. For example if your turnover is more than £150,000 a year, you will be unable to take part.

If you make use of the scheme, you cannot reclaim VAT on purchases, except in certain circumstances. As a result, the FRS works best for people who have few expenses compared to their fee income. VAT on expenses can only be recovered if they are capital items costing £2,000 or more or if the assets are still within the business on the date of registration.

How do you apply for the FRS?

The Flat Rate Scheme can commence at the beginning of any VAT accounting period and it is very easy to change tax programmes. Simply download an application form from the HMRC website and post it to them.

Final tip

Work done for EU businesses is outside the scope of UK VAT and is therefore excluded from the Flat Rate Scheme calculations.

By John Crawford, managing director of the VAT Consultancy, which offers advice and guidance on up-to-date VAT issues.



28th September 2011

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