VAT threshold and 14.5%

[RBS]

Good morning all,

Am I missing something? Apparently if you are VAT registered and your turnover is less than 280k PA, then you only forward 14.5% VAT to taxman(out of 20% you receive).

 

[johndon68]

Yes, if you are on the Flat Rate Scheme albeit the exact percentage depends on the type of the business. You can't reclaim VAT on purchases though (with a few, limited exceptions I believe).

John

 

[RBS]

Where can I read more about this?

 

[johndon68]

https://www.gov.uk/vat-flat-rate-scheme/overview

It works for me as a service business as I make very few purchases but it may not work for you. There are calculators available that will give you an idea if you would be better off on the FRS or not.

John

 

[RBS]

Live and learn. Accountant hasn`t mentioned anything ever regarding VAT.

So it is actually beneficial being VAT registered for IT consultant, because he would earn extra 5.5% from VAT.

 

[johndon68]

All my sales are B2B with very few purchases so it was a bit of a no-brainer when my accountant suggested it a couple of years ago.

John

 

[john1989]

Live and learn. Accountant hasn`t mentioned anything ever regarding VAT.

So it is actually beneficial being VAT registered for IT consultant, because he would earn extra 5.5% from VAT.

Most IT contractors that provide a B2B service voluntarily register for VAT as it provides a small profit for them by registering.

This is basic tax planning. If it is something your accountant has missed, there are probably other tax savings to be had elsewhere.

 

[RBS]

Just used one of those calculators, saving would be aroun 1.3k PA going to FRS - not a lot, but thats a small holiday.

 

[john1989]

Just used one of those calculators, saving would be aroun 1.3k PA going to FRS - not a lot, but thats a small holiday.

More in the first year as you get a 1% discount.

 

[UK Contractor Accountant]

Standard tax planning for IT Contractors - often missed by Accountants that are not speciliased Contractor Accountants.

Also see a few that get the category wrong for FRS - not all IT consultants should be on 14.5%.

Turnover has to be £150K or less to join the VAT FRS.

 

[Steve Carey]

You can make an application to use the VAT Flat Rate scheme online, but be careful because it often gives the wrong rate to use. Also, HMRC have recently (June 2016) changed their guidance, after several defeats at Tribunal. Result is some rates previously used were too high, and VAT refunds can be obtained going back up to four years. Categories affected are mainly contractors and consultants, so worth having a look at HMRC's own FRS manual for the detail. My apologies, but as a new contributor I cannot post hyperlinks. The scheme also reduces the risk as you have only 2 entries to put on each return (unless you do business in the EU). The incentive is taxable as part of your profits, but it's usually worthwhile. You have to maintain full accounting records for income tax/ corporation tax purposes, but the level of detail needed for VAT is much less. Hope that helps. Steve Carey

 

[MyAccountantOnline]

.....You have to maintain full accounting records for income tax/ corporation tax purposes, but the level of detail needed for VAT is much less. Hope that helps. Steve Carey

I know a few years ago it was often said using the FRS saved on bookkeeping but I actually dont really think it makes any difference.

Any decent accounting package or software will deal with VAT so whichever scheme you use you still enter the same transactions.

 

[kevin.doran]

Just used one of those calculators, saving would be aroun 1.3k PA going to FRS - not a lot, but thats a small holiday.

Apply to backdate the registration if appropriate.

 

[kevin.doran]

I know a few years ago it was often said using the FRS saved on bookkeeping but I actually dont really think it makes any difference.

Any decent accounting package or software will deal with VAT so whichever scheme you use you still enter the same transactions.

Hmmm...I'd still say it possibly does. It makes balancing the VAT control a/c's much easier if there's ever an error [we all know softwares love a bug after all] plus it means VAT doesn't necessarily have to be tracked on expenditure.

 

[MyAccountantOnline]

Hmmm...I'd still say it possibly does. It makes balancing the VAT control a/c's much easier if there's ever an error [we all know softwares love a bug after all] plus it means VAT doesn't necessarily have to be tracked on expenditure.

I disagree Kevin you still enter the same transactions ie the payments, receipts and invoices etc the software/package does the number crunching. You should be checking the figures produced regardless of what scheme is used. I truly see no time saving if you use a decent accounting system.

I think the only way the FRS saves time with bookkeeping is if your only records are a very basic spreadsheet listing in's and outs and the VAT is simply adding up the sales and multiplying them by the FR% but that isnt really decent accounting records.

 

[UK Contractor Accountant]

I think the only way the FRS saves time with bookkeeping is if your only records are a very basic spreadsheet listing in's and outs and the VAT is simply adding up the sales and multiplying them by the FR% but that isnt really decent accounting records.

is for most IT Contractors

I think the largest Contractor Accountants in the UK still dole out the bespoke excel spreadsheet book-keeping package when you sign up.

 

[MyAccountantOnline]

......I think the largest Contractor Accountants in the UK still dole out the bespoke excel spreadsheet book-keeping package when you sign up.

I always encourage anyone in business to keep decent records.

A bespoke Excel spreadsheet is a bit different to something someones cobbled together

 

[kevin.doran]

I disagree Kevin you still enter the same transactions ie the payments, receipts and invoices etc the software/package does the number crunching. You should be checking the figures produced regardless of what scheme is used. I truly see no time saving if you use a decent accounting system.

Sorry, must say I still disagree. If you're on FRS it means there's no need to post any VAT on the expenditure. It may be a good idea to do so but not a requirement. In not doing so a) you're not cluttering up the VAT control accounts with unnecessary entries (which makes much easier viewing if there's ever a VAT query) and b) you can analyse a bank import without having to query each item for the input VAT - the latter being the true time saver.

Lots of contractors travel for a living, picking up numerous small expenses along the way. The reason for the expense might be fairly obvious [ABC Hotel] but whether or not they're charging VAT is a different matter.

 

[MyAccountantOnline]

Sorry, must say I still disagree. ......

No apology necessary Kevin we can agree to disagree

Ultimately we are only talking about one of the selling points of the FRS when after all the real advantage is the additional income which some businesses gain in using the scheme.

 

[john1989]

Sorry, must say I still disagree. If you're on FRS it means there's no need to post any VAT on the expenditure. It may be a good idea to do so but not a requirement. In not doing so a) you're not cluttering up the VAT control accounts with unnecessary entries (which makes much easier viewing if there's ever a VAT query) and b) you can analyse a bank import without having to query each item for the input VAT - the latter being the true time saver.

Lots of contractors travel for a living, picking up numerous small expenses along the way. The reason for the expense might be fairly obvious [ABC Hotel] but whether or not they're charging VAT is a different matter.

I agree.

Many clients will do the bookkeeping themselves but still want the VAT return to be filed by the accountant.

I wouldn't be happy submitting a return without doing some checks on the underlying records. This takes time.

At the very least, ensuring that VAT hasn't been reclaimed in full on company cars etc.

Even doing the VAT returns themselves, some checks should be done before submitting. If there's nothing to check on the purchases because there's nothing to reclaim, then it can only save time.

 

[TheCyclingProgrammer]

Just used one of those calculators, saving would be aroun 1.3k PA going to FRS - not a lot, but thats a small holiday.

Make sure you're comparing the surplus made on the FRS with the average amount of VAT you pay on purchases to get a true picture of profitability from being on the scheme. As has been said for many service companies it often does result in a profit, but not always. You can make a loss on the scheme.

You can also reclaim VAT on single purchases of capital goods totalling £2k or more including VAT and the reverse charge on any *services* purchased from outside the UK are also handled outside the FRS so you won't pay any VAT on them either, but like any UK purchases you won't be able to reclaim any VAT on imported *goods* (acquisitions).

 

[Gareth ACA Accountant]

Live and learn. Accountant hasn`t mentioned anything ever regarding VAT.

So it is actually beneficial being VAT registered for IT consultant, because he would earn extra 5.5% from VAT.

Its slightly different to this.
Lets say you are currently not VAT registered and you charge £100. You receive £100 and that's the end of it
If you are flat rate VAT registered on 14.5% then you charge £100. Your bill is actually £120 (you customer reclaims £20 so it only costs them £100).
You however receive £120 cash. Its this amount you apply 14.5% to - the gross amount. So of the additional £20 you've received, you pay over £17.40p to HMRC making £2.60p.
You're still up but not by as much as you initially thought.
However(!) you are not allowed to reclaim any of the VAT you have suffered on expenses.
If your associated VATable costs (including VAT) were more than £13 (£2.6/20% from a purely VAT calc perspective, you would be worse off, not better off.
The moral of the story - HMRC don't give money away in general. You need to run the specific numbers for your own business to see whether its worth it.
Administratively it may be a benefit as its easier (especially on the annual scheme) and of course there is the first year discount of 1% which can be beneficial, but as always - it depends!

 

[Gareth ACA Accountant]

Just to follow this up - I recently wrote a post on my site about the confusion over the flat rate VAT scheme that might be of help:
http://www.theaccountingstudio.co.uk/vat-flat-rate-scheme-costing-money/

 

[Clare@ClarityTaxation]

To add a word of caution - if you make a lot of zero rated sales, which can be the case if you sell overseas, the Flat Rate Scheme might be inappropriate for you as you would still pay the flat rate on sales invoices you've not charged VAT on. Check the full details before signing up for it, or ask your accountant.

 

[TheCyclingProgrammer]

To add a word of caution - if you make a lot of zero rated sales, which can be the case if you sell overseas, the Flat Rate Scheme might be inappropriate for you as you would still pay the flat rate on sales invoices you've not charged VAT on. Check the full details before signing up for it, or ask your accountant.

But remember not to confuse zero rated and outside the scope of U.K. VAT (like B2B supplies of services outside the U.K.) as the latter is excluded from our flat rate turnover.