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VAT Flat Rate Scheme

What is it?

The default HMRC VAT schemes requires to declare and pay the full amount of VAT charged on sales/invoices to HMRC. The Flat Rate Scheme (FRS) for VAT lets you reclaim some of that money.

How does it work

Under the Flat Rate Scheme (FRS) for VAT, you agree a fixed rate with HMRC and keep the difference.

Your eligibility and rate is determined by your turnover and business sector.

For example, if you had an FRS rate of 11% and made sales (VAT Inclusive at 20%) of £21,600 in a quarter. You would pay HMRC £2,376 and keep the difference of £1,224

The FRS calculation is made off the VAT inclusive (gross) figure.

Because you are partially reclaiming VAT on your sales, you are unable to reclaim VAT on purchases.

 

Capital Assets

A purchase of a capital asset worth £2,000 or more is eligible for the VAT to be reclaimed.

KashFlow will work this out for you.

  1. Setup a new purchase code (settings > Purchase Codes).
  2. Make sure the type is set to “Fixed Asset”.
  3. Enter your purchase into KashFlow. Remember the total value of the fixed assets on the purchase must be equal or greater than £2,000.

You can have a purchase with multiple lines of fixed, assets, and multiple payments, and as long as the total of the fixed assets on that single purchase is £2,000 or greater, it will be included.

Potential mistakes:

A fixed asset cannot be categorised as a service. If you are also dealing with purchases from EC suppliers you will not be able to untick the option to “Treat purchases of this code from suppliers in other EC states as a product on my VAT return”.

Purchases from Europe & Reverse Charge

Purchases from VAT registered business in Europe are outside the scope of FRS and will be included on your VAT return.

If you purchase services from outside the UK (including Europe) these can be eligible for reverse charge. Whereby the VAT due on the service purchase is both declared and claimed together, effectively cancelling out the VAT due.

KashFlow will calculate this for you if you have marked the purchase code as a service.

 

Further Information:

See how KashFlow works with your business and your books