Good News for Flat Rate Scheme (FRS) users
One of the things that some businesses who are eligible to use the FRS find difficult to deal with is that the turnover to which they apply the flat rate percentage includes the following:
- standard rated turnover;
- reduced rate turnover;
- zero-rated turnover; and
- exempt turnover.
So if a business has a lot of the latter three types of turnover it is unlikely that it will join the FRS.
On the other hand, if these latter three form only a small part of the business’s turnover, it may still be worth joining the FRS to take advantage of the reduced administration that’s needed to be able to do the VAT return.
Every business that I know has at least one business bank account. Most have at least two; probably because their bank automatically sets up a savings account alongside the current account. The problem with this is that because of the rules about what has to be in the turnover for the FRS any interest earned on these accounts had to be included.
I used the word ‘had’ in the last sentence of the previous paragraph because it seems likely that HMRC is going to have to consider its policy on this issue after the decision of the First Tier Tax Tribunal was released recently in the case of Fanfield Limited and Thexton Training Limited. In this decision the taxpayers appealed against a decision of HMRC that the interest was within the scope of VAT. The Tribunal allowed their appeal on the grounds that the amount of interest earned was too small to be “in the course or furtherance” of a business.
The benefits to users of the FRS from this decision are going to be small. It does, however, mean that their profits will be marginally larger.
Let me have your thoughts on this by leaving a comment below.
As the old table for the FRS may still be useful to businesses, I’ve added a new page with the tables for the period from 1 January 2010 to 3 January 2011.
What’s the new VAT Fraction?
Now that the new rate of VAT is here I’m being asked: what is the new VAT fraction?
The new VAT fraction is 20/120 or 1/6.
Why is this important?
It’s an easy way to work out how much VAT there is in a VAT inclusive amount.
For example, you buy some note pads and box of pens from the stationers. You pay £24.00 and get a till receipt that shows just the two items, note pads and pens, how much they cost, the total charge, the rate of VAT (20%), and the stationer’s details. So, what’s the VAT?
24 ÷ 6 = 4
There you have it, the VAT in £24 is £4.00.
The VAT fraction for 17.5% rate of VAT is 7/47. So to work out the VAT at 17.5% the calculation looks like this:
24 x 7 ÷ 47 = 3.57
If you have any questions please leave a comment below – I’ll respond as soon as I can.
Small businesses can be supported by the Government?
In an article in the Daily Telegraph they highlight the benefits of using the Flat Rate Scheme.
If your businesses turnover is below £150,000 you will be able to use the scheme. The question you need to consider is whether there are any benefits to you and your business in using the scheme? There are two obvious benefits that could be useful to you:
- Working out how much VAT you have to pay is easy; and
- You could pay less VAT on the Flat Rate Scheme.
The Flat Rate Scheme is only of use to you if you make mostly standard rated supplies, i.e. you charge VAT at 17.5% (20% from 4 January 2011) on most of your sales. This is because the Flat Rate you use is applied to all your ‘business income’ whether you have charged VAT at the standard rate, reduced rate, or zero rate. It even applies to those sales that are exempt from VAT.
The first thing you need to do is to check on which Flat Rate you need to apply. You can find the table for the rates that apply from 4 January 2011 here. After that you need to review how much VAT you would pay using the scheme and whether that would be less than if you use the ordinary VAT accounting methods.
You will probably benefit from seeking professional help, so ask your accountant or VAT adviser before you decide. They’ll know the potential problems or pitfalls that you are likely to face.
Got any questions? Leave a comment and ask – I’ll reply as soon as I can.
If you prefer call me on 01293 734545.
HMRC have published new percentages to be used by all businesses on the Flat Rate Scheme.
I’ve put a copy of the table on my website.
