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UK Flat Rate Scheme: How does it work?

 

 

Please be aware that to qualify for the VAT FRS, you should have already received a decision with regards to the suitability of the type of your business you are running as well as the total turnover. HMRC should then advise you of what flat percentage rate you should be using as an alternative to the standard rate.

In general, businesses below a certain VAT turnover threshold, can qualify to use the VAT FRS. Refer to HMRC website to find current maximum turnover.

Any business with a VAT turnover of the stated amount on the HRMC link or less can qualify for the VAT FRS.

How does it work?

With the VAT FRS, unlike the standard VAT, where you usually pay to HMRC the difference between what a business charges its customers for Sales VAT and what the business pays for Purchase VAT, with the FRS you will instead keep the difference between the VAT charged on your Sales, less the flat rate percentage.

 

Standard VAT Example:

VAT charged on Sales  @ 20% £1,600
VAT paid on Purchases @20% (£ 800)*
Amount owed to HMRC   £800

 

Flat Rate Example:

The business type - a museum

VAT charged on Sales  @ 20% £1,600
VAT Flat rate to be paid to HMRC at an agreed rate @ 9.5 % of £1,600 £(152)
Amount you get to keep  £1,448

When using the Flat Rate Scheme, you will find that some of the codes will post differently than on standard VAT.

UK VAT Codes

VAT Code/Rate Description How does this report on my VAT 100 return?
Code used on sales form Code used on purchase form
20.0 % S Standard rate VAT (from January 4, 2011 forward)

If you are registered for VAT, you have to charge VAT at the standard rate on all goods and services you supply, unless they fall into another category. Before using anything other than the standard rate, go to HMRC's website to find out what rate of VAT applies in any particular set of circumstances.

VAT at FRS% to Box 1 Net Sale to Box 6 VAT at 20% to Box 4 Net Purchase to Box 7
5.0% R Reduced rate VAT

A reduced rate of VAT applies to some goods and services - including items such as domestic heating fuel and children's car seats. Sometimes the reduced rate only applies in certain circumstances, or it may depend on who the customer is. It's important to read the detailed rules on HMRC's website to understand when the reduced rate can be used.

VAT at FRS% to Box 1 Net Sale to Box 6 VAT at 5% to Box 4 Net Purchase to Box 7
0.00% Z Zero rate VAT

Some goods and services are zero-rated. This means they are taxable for VAT, but the VAT rate is zero percent. Sometimes the reduced rate only applies in certain circumstances, or it may depend on who the customer is. Read the detailed rules on HMRC's website to understand when the zero rate can be used.

VAT at FRS% to Box 1 Net Sale to Box 6 VAT at 0% to Box 4 Net Purchase to Box 7
Exempt Exempt

Some goods and services are exempt from VAT. These include: •             insurance (but there is an Insurance Premium Tax (IPT) that may apply instead) •             some services from doctors and dentists •             some types of education and training Special rules apply for businesses that are exempt or 'partly exempt'. Please go to HMRC's website for further details.

VAT at FRS% to Box 1 Net Sale to Box 6 Net Purchase to Box 7
20.0% RC SG Default reverse charge VAT code for services. N/A +/- VAT at 20% to Box 4

Net to Box 6

20.0% RC MPCCs Reverse charge for the purchase of computer chips and mobile phones. N/A +/- VAT at 20% to Box 1 & 4 +/- Net Purchase to Box 7 & 9
No VAT Outside the Scope of VAT Some goods and services are outside the scope of VAT and are not reported on the VAT return. This includes anything you: •             sell (or otherwise supply) when you're not registered for VAT - and you don't need to be registered •             buy or sell outside the European Union (EU) •             sell (or otherwise supply) but not as part of your business - for example, if you occasionally receive income from sources such as leisure activities or hobbies •             buy and sell for your own personal use, such as a hobby Other goods and services outside the scope of VAT include: •             donations to charity freely given by a business where the giver does not receive anything in return •             statutory fees and services, e.g., MOT testing, congestion charge •             tolls for bridges, tunnels and roads operated by public authorities •             low cost welfare services provided by charities N/A N/A

EC VAT Codes

As a business that is registered for VAT, if you purchase goods from another business that is registered for VAT in an EC Member State, you should not be charged VAT if you give the supplier your VAT registration number. The supplier will then charge you under the reverse charge mechanism and you can then account for the VAT at the rate applicable in your country.

If you ship goods to a customer in an EC Member State, you should not charge VAT if your customer supplied a valid VAT registration number. You can check the VAT number at the European Commission website. You then charge your customer under the reverse charge mechanism. The invoice must include the words “reverse charge”. Some examples from HMRC that fulfill the legal requirement are:

  • Reverse charge: VAT Act 1994 Section 55A applies
  • Reverse charge: S55A VATA 94 applies
  • Reverse charge: Customer to pay the VAT to HMRC

If you do not receive a valid VAT number, you must apply the applicable VAT rate. For example, VAT charged at 20% is VAT code 20% S. For qualifying transactions, use one of the following EC VAT codes:

VAT Code/Rate Description How does this report on my VAT 100 return?
Code used on sales form Code used on purchase form
20.0% ECG Intra EU B2B purchase of Goods (after 4th January 2011)

Used for Intra EU B2B (business to business) purchase (acquisition) of goods after 4th January 2011. In B2B transactions, it is the customer who must account for any VAT due via the reverse charge mechanism (i.e. the customer must act as if they are both the supplier and the recipient of the goods).

N/A +/- 20% VAT to Box 2

Net to Box 7 & 9

0.0% ECG Intra EU B2B Supply of Goods

Used for Intra EU B2B (business to business) sale (supply) of goods. If the EU customer is not VAT-registered, then the applicable UK rate of VAT is charged.

VAT at FRS% from Box 6 to Box 1 Net Sale to Box 6 & 8 Purchase to Box 9 Does not affect FRS gain/loss
20.0% ECS Intra EU B2B purchase of Services (after 4th January 2011)

Used for Intra EU B2B (business to business) purchase of services after 4th January 2011. In B2B transactions, it is the customer who must account for any VAT due via the reverse charge mechanism (i.e. the customer must act as if they are both the supplier and the recipient of the services).

N/A Does not affect any boxes
0.0% ECS Intra EU B2B Supply of Services

Used for Intra EU B2B (business to business) sale of services. If the EU customer is not VAT-registered, then the applicable UK rate of VAT is charged. It is important to note that the Place of Supply on services changed from January 2010 as follows: •             For B2B (business to business), the place of supply is where the customer (receiver of services) is based. •             For B2C (business to consumer) the place of supply is where the business (provider of services) is based.

N/A Standard VAT to Box 1 & 4

Net to Box 6 & 7

0.0% RC Intra EU Reverse Charge

Used for Intra EU B2B (business to business) transactions on computer chips and mobile phones. (Notice 735 refers).

Sales Box 1 (FRS amount on Sales)

Gross to Box 6

N/A

 

 

Note: VAT on standard purchases can be claimed back, however VAT cannot be reclaimed back on your purchases under the FRS, since it is deemed the discounted fixed rate already considers this and has taken into account the VAT purchases. The only exception is on capital assets beyond the current  £2000 threshold.

Here is the guideline from the HMRC site for flat rate percentage for different types of business. For further inquires regarding which FRS percentage you should be using, please contact HMRC directly.

 

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