The Flat Rate Scheme(FRS) was designed to facilitate entrepreneurs to simplify the sales and purchases record.It allows to apply a fixed flat rate percentage(%) to gross turnover to pay the VAT due to HMRC .However fixed rate percentages vary depending on the nature of business.The scheme is for businesses with a turnover no more than £150k yearly.
HMRC assumes that FRS has been abused by businesses to save VAT specially where no VAT purchases.Now effective April 2017 the VAT flat rate percentage is 16.5% of gross turnover that equivalent to 16.5% *120%=19.8% so there is no benefit to remain in VAT Flat rate scheme if you don’t pass the VAT FRS eligibility criteria:
VAT Flat Rate Eligibility Criteria:
If you spend a small amount on goods, you are classed as limited cost business if your goods cost less than either:
a) 2% of your turnover
b) £1,000 a year(if your costs are more than 2%
This means you pay higher rate of 16.5%.You can calculate if you need to pay the higher rate and work out which goods count as costs.
If you don’t fall under VAT FRS,There are lots of VAT schemes to choose from:
1) Standard VAT Rate
2) VAT Cash Accounting
3) Annual Accounting scheme for VAT
4) Retail VAT
5) VAT Margin scheme
These all produce different results so if you have not yet decided, there is still time to make comparison and discuss with your accountant.