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To HMRC's FRS application page

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FRS may not be simple but it can save you VAT

FRS simplified (not!)

Any business can apply to HMRC to use its flat rate scheme (FRS) as long as its annual turnover is less than £150,000 (see The next step ). Once in the FRS you charge your customers VAT following all the usual rules, but there are some tricky extra ones to watch out for.

Accounting for VAT

While you charge VAT as usual how much you pass on to HMRC is worked out differently. Firstly, you must choose from HMRC’s list of 55 trades which description best fits yours. The percentage associated with this is then used to work out how much of the VAT you’ve collected is payable to HMRC. This is a common cause of confusion and dispute with HMRC.

Trap. If you can’t find a good fit for your business you might choose the wrong one and so account for the wrong amount of VAT to HMRC.

Tip. If you’re unsure contact HMRC’s VAT helpline (0300 200 3700) for advice. Keep a record of the time, date and person you spoke to.

Trap. If you run more than one business you must find the percentage from HMRC’s list for the trades that account for the largest part of your turnover and apply it to all your income.

Tip. If the turnover for each trade is fairly even monitor them so that if the balance changes you can switch percentages. In one case a pub owner used the rate for public houses, 6.5%, but he also sold food, sales of which were greater than the bar sales. HMRC ruled the correct category was catering and restaurants with a flat rate of 12.5%. The result was a large VAT bill plus penalties.

Building industry

The construction industry is always under scrutiny from HMRC and ensuring correct use of the FRS is high on its agenda.

Tip. If you’re in the trade make sure you use the correct flat rate percentage. There are two: 14.5% for businesses where turnover mainly relates to labour plus up to 10% for material, or 9.5% for general building and construction services.

Selling a car

You probably know that normally when you buy a car for use in your business (not as stock if you’re a car trader) you can’t reclaim VAT. Equally, when you sell it you don’t have to account for VAT.

Trap. Under the FRS you must pay VAT on whatever you receive from selling a car. So if your FRS percentage is 14.5% and you sell a car for £3,000, you add £435 to the VAT payable on your next VAT return.

Turnover trick

While you can only join the scheme where your turnover is less than £150,000 you don’t have to leave it until it exceeds £230,000. Because of the potential VAT savings from using the FRS rates, being in the scheme can be quite lucrative. So while we dispute HMRC’s claim that the FRS is a simplification, we recommend using it where it saves you VAT. You just need to crunch the numbers first to see if it’s worth it.

For a link to HMRC’s FRS application page, visit http://tipsandadvice-tax.co.uk/download (TX 15.18.07).