VAT FRS new rate

[youngguy]

The only way to remain VAT neutral is to move on to the standard scheme. If you're caught by the new rules, which leave you with only £200 surplus on £100k net turnover (IIRC) then you're almost certainly going to make a VAT loss (unless you're total VATable expenses are less than £1k net - your accounting costs are probably around that alone).

I have no doubt I am being a thickie.... But why is a loss made? Surely we 'collect' VAT for hector and as a reward he let us keep a bit. Now we keep a whole lot less. So how does that means we make a loss?

[Lance]

Does show that when you do ask them you still need to do your research and understand what they are telling you though.

Absolutely this. I always check. Today's exception was I had smashed my phone and wanted to check whether I should wait till April (under normal VAT) to buy the phone. Under his false, and hastily provided, advice I went and bought a new phone. That's cost me only £120 more than it could have, so I'm not losing sleep, but it's the last straw for the accountant.

[TheCyclingProgrammer]

I have no doubt I am being a thickie.... But why is a loss made? Surely we 'collect' VAT for hector and as a reward he let us keep a bit. Now we keep a whole lot less. So how does that means we make a loss?

You're making the common mistake as looking at the bit that HMRC lets you keep on the FRS as a "reward". It was never intended to be that, it was always supposed to provide an indirect way of recovering of any VAT you've incurred on your expenses. It just so happened that if this surplus amount exceeded the amount of VAT you pay during the year you'd make a bit of profit.

The "surplus" amount that the new percentage gives you is simply not enough for most of us to recover the VAT on our costs so we're effectively having to charge VAT to clients whilst not being able to recover the VAT we pay. Its only £200 on £100k turnover which only allows for £1k in VATable expenses before you start losing out.

Examples with £100k net turnover and £10k in net VATable expenses:

Registered on standard scheme:
VAT charged: £20k
VAT paid: £2k
VAT paid to HMRC: £18k
Gross profit: £90k

Registered on FRS under new percentage:
VAT charged: £20k
VAT paid: £2k (not reclaimable)
VAT paid to HMRC: (16.5% * £120k) = £19.8k
Gross profit: £88.2k

Being on the FRS has made you £1800 worse off, because the amount of VAT you've paid exceeds the amount of VAT recoverable on the FRS.

On the standard scheme you will always recover the VAT you've paid, no more, no less.

[TheCyclingProgrammer]

Absolutely this. I always check. Today's exception was I had smashed my phone and wanted to check whether I should wait till April (under normal VAT) to buy the phone. Under his false, and hastily provided, advice I went and bought a new phone. That's cost me only £120 more than it could have, so I'm not losing sleep, but it's the last straw for the accountant.

You could always return the phone and buy a new one again in April.

[Lance]

You could always return the phone and buy a new one again in April.

nah. Life's too short to waste time going round shops. I can earn it faster than I could do the round trip

[Graham1967]

I just rang my accountant to talk about whether to ditch FRS with the new rate of 16.5% that starts in April.
He said that I can stay on the 14.5% rate. This is not what I (and CUK forum last week) understood as I believed that the 16.5% rate for labour-only businesses was likely to include most PSCs.


So before anyone jumps..... check........

What you accountant is saying is absolute carp. If he read the technical note and realised what type of business you are (labour only) then he would not be giving this advice.

However he does not know your business, and as much as he sounds like your best mate down the pub on the phone, he is not.

My advice to all contractors I meet and who come out with "I leave that to my accountant" need to understand that you and you alone are responsible for your tax affairs as the director of your limited company. Your accountant acts on the information that you provide. This is stated in the preface of the prepared accounts.

Doing your own accounts is a pretty simple affair however some accountants like to dress it up with smoke and mirrors.

Some of the eye watering rates I hear them charging yet their services are woeful. Some I've heard in the last few weeks, late registering for the flat rate vat scheme causing over charging of vat. Another telling a contractor to buy goods for £2k and sell to his wife's business so he can keep stay on the FRS after April.

In my previous life running a business with staff, I changed accountants a couple of times, one said I owed £10 vat, which was wrong, and the other gave me such bad advice (which he denied) I had to close my LTDco leaving £70k in the DLA.

Accountants do your books. Don't ask for or take advice advice from them. That you are best finding out for yourself.

[mudskipper]

I'm not sure why people are struggling so much with these new rules - as ridiculous as I think they are, they are at least fairly simple to get your head around.

https://www.gov.uk/government/public...technical-note

TLDR: must be goods, must be greater than 2% of annual gross turnover and greater than £1k, bought exclusively for business purposes, cannot be capital expenditure (as defined by VAT rules, not how you treat the purchase for accounting purposes), cannot be any travel or subsistence, cannot be vehicles (except for transport businesses).

Common things we incur as costs that are services, not goods (or otherwise excluded by the above rules): travel, subsistence, accommodation, accountants and other legal fees, insurance, hardware purchases that would be considered capital under VAT rules (anything that is expected to have value over a period of time, such as phones, computers, tablets, office furniture etc.), web hosting, domain names, computer software (digital downloads), web services.

In other words, pretty much everything.

Almost

It's calculated per accounting period, not per annum.

[northernladuk]

Almost

It's calculated per accounting period, not per annum.

Boooooooom!

[youngguy]

You're making the common mistake as looking at the bit that HMRC lets you keep on the FRS as a "reward". It was never intended to be that, it was always supposed to provide an indirect way of recovering of any VAT you've incurred on your expenses. It just so happened that if this surplus amount exceeded the amount of VAT you pay during the year you'd make a bit of profit.

The "surplus" amount that the new percentage gives you is simply not enough for most of us to recover the VAT on our costs so we're effectively having to charge VAT to clients whilst not being able to recover the VAT we pay. Its only £200 on £100k turnover which only allows for £1k in VATable expenses before you start losing out.

Examples with £100k net turnover and £10k in net VATable expenses:

Registered on standard scheme:
VAT charged: £20k
VAT paid: £2k
VAT paid to HMRC: £18k
Gross profit: £90k

Registered on FRS under new percentage:
VAT charged: £20k
VAT paid: £2k (not reclaimable)
VAT paid to HMRC: (16.5% * £120k) = £19.8k
Gross profit: £88.2k

Being on the FRS has made you £1800 worse off, because the amount of VAT you've paid exceeds the amount of VAT recoverable on the FRS.

On the standard scheme you will always recover the VAT you've paid, no more, no less.

Thanks, really really helpful.

[TheCyclingProgrammer]

Almost

It's calculated per accounting period, not per annum.

You're right though the £1k rule is per annum.

In theory this means your percentage could vary each quarter though in practice I doubt this will make much difference to the average contractor.