If you are a VAT registered business you are required to declare all your sales VAT, and to claim back VAT on your purchases, on a VAT return form every three months. For some businesses, using the flat rate scheme can save both time and money.
By using the FRS, instead of accounting for all VAT on sales and purchases, you simply declare VAT on a set percentage of gross sales, with no need to account for purchases at all. The percentage used depends on the type of business you operate, but is always lower than the standard rate of VAT, to compensate for the fact that no purchase tax is being reclaimed.
A full list of rates used can be found on the HMRC website at http://www.hmrc.gov.uk/vat/start/schemes/flat-rate.htm
For example, supposing a hotel turns over £83,000 inclusive of VAT in a quarter. The VAT that will be paid over is simply £83,000 x 10.5% = £8,715. The 10.5% is the rate that applies to hotels as per HMRC. There is no need to worry about VAT on expenses so the process is greatly simplified.
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Although you can’t normally reclaim VAT on expenses, capital items worth more than £2,000 can still be claimed. So for the hotel business above, if they had purchased a computer system costing £3,000+VAT, then input tax of £600 could be claimed in box 4 of the VAT return in the usual way, reducing their VAT liability by £600 to £8,115.
Adopting the FRS won’t always save money. It depends very much on the individual business and can even vary from one quarter to the next. It is therefore generally advisable to compare the two over a period of time to assess whether the FRS is a cost effective option. Unlike with the cash accounting scheme, which can be adopted at any time, HMRC should be notified in advance if the FRS is to be used.
For more info about VAT please visit the website of N S Accountancy, providing bookkeeping and accountancy services in the North East and click on the services section.