Quantifying FRS Benefits

[explorer]

Time and again a new thread appears, asking if we are better-off being on FRS. Just did some basic maths, and here are the facts:

1. In any period of time, you save 2.225% of your (ex VAT) invoice amt, by being on FRS (assuming negligible expenses), i.e., you can multiply your invoce amt (ex VAT) by .02225 to arrive at a figure giving you the amount of money you saved by being on FRS. work out your average expenses in the same period, deduct from the figure obtained above, and see for yourself if you benefit by being on FRS.

2. The percentage and the multiplier, if you are in the first year of yourCo formation, are 3.4% and .034, respectively.

3. The figures, when the VAT and FRS rate were 15% and 11.5% respectively, were 2.925%/0.02925 during the first year of a company's formation, and 1.775% and .01775 afterwards.

So, the new year has brought-in some extra effortless savings for us contractors. we are better off by 0.45% (2.225-1.775) of your ex VAT billing amount in any given period of time, if on FRS.

Happy new year Guys..

[northernladuk]

Would that show as extra income and therefore be taxed?

[explorer]

Would that show as extra income and therefore be taxed?

I would call it a little extra "saving", rather than extra "income", and yes, since it goes to be a part of yourCo's gross profit, I would think that normal profit taxation rules apply (CT etc). However, can remember someone's post, not too long ago, suggesting that this "profit" HAS to be disbursed the PAYE way, and not via divvy. Couldn't find any ruling implying that on HMRC's site, though...Anyone, any ideas?

[OrangeHopper]

If you are caught by IR35 then any FSR saving on that income must distributed be through PAYE.

Otherwise it is simply another profit item on the profit & loss sheet and subject to company tax.

PS. Any advice I give can be wrong and often is.

[BolshieBastard]

Time and again a new thread appears, asking if we are better-off being on FRS. Just did some basic maths, and here are the facts:

1. In any period of time, you save 2.225% of your (ex VAT) invoice amt, by being on FRS (assuming negligible expenses), i.e., you can multiply your invoce amt (ex VAT) by .02225 to arrive at a figure giving you the amount of money you saved by being on FRS. work out your average expenses in the same period, deduct from the figure obtained above, and see for yourself if you benefit by being on FRS.

2. The percentage and the multiplier, if you are in the first year of yourCo formation, are 3.4% and .034, respectively.

3. The figures, when the VAT and FRS rate were 15% and 11.5% respectively, were 2.925%/0.02925 during the first year of a company's formation, and 1.775% and .01775 afterwards.

So, the new year has brought-in some extra effortless savings for us contractors. we are better off by 0.45% (2.225-1.775) of your ex VAT billing amount in any given period of time, if on FRS.

Happy new year Guys..

Did you take into account the fact that any extra 'savings' you make from being on the FRS is included in the calculation for corporation tax as well?

I seriously doubt there is any real benefit of being on the FRS (or any one of the other VAT scams schemes unless you are over the threshold.

In fact, I think it just gives HMRC another reason to investigate your co. Im in the process of closing down my ltd co and starting up a new one to lessen the possibility of an IR35 investigation. Not registering for VAT by managing my income to be under the registration threshold will give the slimey bastards one less chance of opening an investigation in the new co.

[XLMonkey]

Did you take into account the fact that any extra 'savings' you make from being on the FRS is included in the calculation for corporation tax as well?

I seriously doubt there is any real benefit of being on the FRS (or any one of the other VAT scams schemes unless you are over the threshold.

You're right that the gain on the Flat Rate Scheme is subject to corporation tax (and then income tax when it gets to you). But... its still free money, and it does add up.

I track it as a separate income line in my accounts, which show that it made the company just over 1,200 last tax year.... not riches, but not bad for doing nothing.

[explorer]

If you are caught by IR35 then any FSR saving on that income must distributed be through PAYE.

Otherwise it is simply another profit item on the profit & loss sheet and subject to company tax.

PS. Any advice I give can be wrong and often is.

Linky please??

I'm just thinking loud here, but being caught by IR35 would mean that the realationship between yourself and the client was that of an employee (in disguise), and an employer, rather than that which exists between two businesses. My question is, in those circumstances, are you allowed to take out ANY profits (from the IR35 caught contract), the divvy way? Or if you have already extracted divvy, isn't that treated as salary, and taxed accordingly, and if so, the extra savings by virtue of FRS are treated no differently than the rest of yourCo profit.

[TheCyclingProgrammer]

I would call it a little extra "saving", rather than extra "income", and yes, since it goes to be a part of yourCo's gross profit, I would think that normal profit taxation rules apply (CT etc). However, can remember someone's post, not too long ago, suggesting that this "profit" HAS to be disbursed the PAYE way, and not via divvy. Couldn't find any ruling implying that on HMRC's site, though...Anyone, any ideas?

FRS surplus is normal profit and taxed accordingly; I believe you only have to distribute FRS surplus through PAYE if it has come from an IR35-caught contract.

[TheCyclingProgrammer]

Linky please??

I'm just thinking loud here, but being caught by IR35 would mean that the realationship between yourself and the client was that of an employee (in disguise), and an employer, rather than that which exists between two businesses. My question is, in those circumstances, are you allowed to take out ANY profits (from the IR35 caught contract), the divvy way? Or if you have already extracted divvy, isn't that treated as salary, and taxed accordingly, and if so, the extra savings by virtue of FRS are treated no differently than the rest of yourCo profit.

OrangeHopper posted this the other day:

http://forums.contractoruk.com/accou...-accounts.html

See "Service companies legislation" here:
http://www.hmrc.gov.uk/manuals/bimmanual/BIM31585.htm

Note that the wording is a bit confusing although the example makes it clearer. When it says the "deemed payment calculation" is the VAT exclusive amount, it means the the gross value minus the flat-rate VAT amount, which means the remainder (your FRS surplus) is included in the deemed payment calculation.

However, because you cannot recover input VAT when on the FRS, any VAT on allowable expenses is also allowable when working out the profit.

[explorer]

Did you take into account the fact that any extra 'savings' you make from being on the FRS is included in the calculation for corporation tax as well?

Yes, I did. I acknowledged that in my second post above. It's just extra profit for your limited co. And so the money that you have to shell-out to take out the profit would have to go through the normal process and taxes (Salary -> PAYE, NIC etc, Divvy -> CT etc), but would depend upon your specific circumstances, like the total profit made by yourco in the financial year (for ex, if the latter is too low, you might be able to extract your extra 'savings' for free).

I seriously doubt there is any real benefit of being on the FRS (or any one of the other VAT scams schemes unless you are over the threshold.

Sorry, didn't quite get that. Cann't see why is it not a benefit, if it gives a couple of hundred quids, without any additional effort, unless making money is not the motive of your business.

In fact, I think it just gives HMRC another reason to investigate your co. Im in the process of closing down my ltd co and starting up a new one to lessen the possibility of an IR35 investigation. Not registering for VAT by managing my income to be under the registration threshold will give the slimey bastards one less chance of opening an investigation in the new co.

That went completely over the top. How does being VAT/FRS registered effect your IR35 status? In fact, I would think that being VAT registered would make yourCo look more like a legitimate business, rather than a tax-efficient way to provide employee services to an employer. And the money saved using FRS is legitimate profit, made using the laid down process. HMRC is just discounting a part of tax collected by your business for them, and in return asking you not to claim VAT on your supplies (unless it exceeds a threshold), saving both you and them loads of accounting.