You must have heard and/or read about the changes to the VAT flat rate scheme (FRS) effective 01 April 2017. To summarise, if your cost of sales is less than either 2% of your sales OR £1000 per year, your flat rate will be 16.5%.
I won’t go into why this new directive was implemented but suffice it to say that most, if not all, service freelancers (IT consultants, project managers, locums, etc) on FRS will be affected.
Note that cost of sales for the FRS’s purpose includes only moveable goods used in your business and gas/electricity. Expenses such as travel, telephone, accountancy fees and all other services are excluded.
Consider the following:
- You bill a customer for £1,000, adding VAT at 20% to make £1,200 in total.
Using the 16.5% rate, your flat rate payment will be 16.5% of £1,200, or £198.
Essentially, you ‘made’ £2 that must be accounted for in your tax return but you’ve not been allowed to claim back any VAT on expenses. If you keep a record of those unclaimed VAT, it may transpire that FRS isn’t the best system for you. Consequently, a standard rate or deregistration may be more tax-efficient. Don’t forget to factor in the time spent on quarterly returns.
As far as I can see, the days of FRS VAT registrations are numbered.