VAT Registration

[SueEllen]

So your telling me that the government gives you an extra 4 or 5% of your income with no strings attached?!

There are strings attached.

Read the last paragraph of RichardCranium's post.

The FRS is just for ease of administration but not everyone is on the FRS.

The most important thing to remember is that the VAT people are helpful as long as you don't underpay your VAT. If in doubt speak to them then sort out a correction.

[pmeswani]

So your telling me that the government gives you an extra 4 or 5% of your income with no strings attached?!

Pretty much. Even though you are charging 17.5% on top of your rate / fees, you give the Govt. (for example) 13% of the gross amount (i.e. the rate / fees + 17.5%). So you don't exactly make a lot of money out of it, but you do get something back.

[NorthWestPerm2Contr]

Pretty much. Even though you are charging 17.5% on top of your rate / fees, you give the Govt. (for example) 13% of the gross amount (i.e. the rate / fees + 17.5%). So you don't exactly make a lot of money out of it, but you do get something back.

what do you mean by that?

I believe it is currently 12.5% if you register with flat rate at registration which means you have 5% left over which goes into the business? Next year that goes up to 14.5% giving you 5.5% which is a significant amount of say 60 or 70k (at least 3 or 4k) which can be used for dividends, expenses etc.

[SueEllen]

what do you mean by that?

I believe it is currently 12.5% if you register with flat rate at registration which means you have 5% left over which goes into the business? Next year that goes up to 14.5% giving you 5.5% which is a significant amount of say 60 or 70k (at least 3 or 4k) which can be used for dividends, expenses etc.

With the FRS if you buy a laptop, pay your accountancy fees* and a few other bits and pieces you can't claim the VAT back. (Unless the expense is over around £2000) So you aren't really gaining that much unless you have only non-zero rated expenses i.e. transport.

*Get yourself an accountant asap as from your posts you aren't an accountant.

[NorthWestPerm2Contr]

With the FRS if you buy a laptop, pay your accountancy fees* and a few other bits and pieces you can't claim the VAT back. (Unless the expense is over around £2000) So you aren't really gaining that much unless you have only non-zero rated expenses i.e. transport.

*Get yourself an accountant asap as from your posts you aren't an accountant.

I do have an accountant, but I just want to make sure I know my stuff before asking him. I am not currently VAT registered and I have barely any expenses other than mileage, so I can see this being a good earner if I have calculated things right.

I will register for VAT this month and go on the FRS.

Thanks guys

[Scrag Meister]

what do you mean by that?

I believe it is currently 12.5% if you register with flat rate at registration which means you have 5% left over which goes into the business? Next year that goes up to 14.5% giving you 5.5% which is a significant amount of say 60 or 70k (at least 3 or 4k) which can be used for dividends, expenses etc.

e.g

Gross Invoice £100 + 17.5% = £117.50

You pay FRS VAT (It Consultant) £117.50 * 13% = £15.275 (Gross * FRS Rate)

Profit on VAT = £2.225 (Gross Invoice VAT - FRS VAT)

so although it looks like 4.5% it isn't, it's only 1.9% of gross invoice value, 2.25% of Nett invoice value.

[TheCyclingProgrammer]

I do have an accountant, but I just want to make sure I know my stuff before asking him. I am not currently VAT registered and I have barely any expenses other than mileage, so I can see this being a good earner if I have calculated things right.

I will register for VAT this month and go on the FRS.

Thanks guys

It's not a good earner. The profit gained from flat rate surplus isnt huge and the whole point of it is to cover any input VAT on your expenses. If your input VAT for the year is less than your surplus then congratulations, you've made a profit, in real terms. Bt it wont be much.

Lets say for instance its next year and the VAT is now 20%. We don't know what the FRS percentage will be for IT contractors but lets say it's 15% (it may well be more).

Your £60k net turnover for the year is £72k gross including VAT. Your FRS payment at 15% of gross is £10,800. This leave you with a FRS surplus of only £1200.

So it's already not much. Once you deduct all of the input VAT you have paid out during the year that would have reclaimed if you were on the standard VAT scheme, you may well find that you only have half of that, leaving you very little in terms of real profit.

If you are joining simply to try and make money, you are wasting your time.

[Scrag Meister]

We don't know what the FRS percentage will be for IT contractors but lets say it's 15% (it may well be more).

Oh yes we do, its going to be 14.5% for us IT service contractors.

FRS rates post Jan 2011

[Wanderer]

It's not a good earner. The profit gained from flat rate surplus isnt huge and the whole point of it is to cover any input VAT on your expenses. If your input VAT for the year is less than your surplus then congratulations, you've made a profit, in real terms. Bt it wont be much. If you are joining simply to try and make money, you are wasting your time.

I completely disagree. To me (and probably most folks here), it's money for old rope! Here's my reasoning:

Say £60,000 turnover, pre VAT reg.
VAT reg gives £60,000 + £10,500 VAT = £70,500 inc VAT at 17.5%.
You pay HMRC 12% of the VAT inclusive amount (13% - 1% first year discount) = £8,460.
That gives your company £2,040 gross profit (reduces to £1,335 after the first year) for doing less admin. Kerching.

The downside is that you can't claim back the VAT on anything you buy unless it's a capital expense and the invoice is > £2,000.
The upside is that you don't have to get hundreds of VAT receipts (and you don't always automatically get a VAT receipt, so you may not be able to use them to reclaim VAT).

If you buy a lot of stuff through the company that you could claim VAT on (and remember that not everything has VAT), then maybe you are better off outside the FRS but you would have to have VAT eligible company expenses of well over £12,000 on a turnover of £60,000 to make it worth while.

Even then, I would still consider going on the FRS because it's a load less admin to do with a flat rate rather than faffing about with all your expenses and different VAT rates, zero rated supplies etc.

Or is my math completely wrong here??

(Edit: My numbers were wrong, they should be correct now. Obviously, I am not an accountant and I won't be sacking my one anytime soon! )

[northernladuk]

I completely disagree. To me (and probably most folks here), it's money for old rope! Here's my reasoning:

Say £60,000 turnover, pre VAT reg.
VAT reg gives £60,000 + £10,500 VAT = £70,500 inc VAT at 17.5%.
You pay HMRC 12% of this (13% - 1% first year discount) = £7,200.
That gives your company £3,300 profit for doing pretty much nothing. Kerching.

The downside is that you can't claim back the VAT on anything you buy unless the invoice is > £2,000.
The upside is that you don't have to get hundreds of VAT receipts (and you don't always automatically get a VAT receipt, so you may not be able to use them to reclaim VAT).

If you buy a lot of stuff through the company that you could claim VAT on (and remember that not everything has VAT), then maybe you are better off outside the FRS but you would have to have VAT eligible company expenses of well over £20,000 on a turnover of £60,000 to make it worth while.

Even then, I would still consider going on the FRS because it's a load less admin to do with a flat rate rather than faffing about with all your expenses and different VAT rates, zero rated supplies etc.

Those of us here who have subcontractors may have substantial expenses, but so long as you pay them over £2,000 on each invoice you can claim the VAT back so you're still a winner.

Or is my math completely wrong here??

Looks ok to me but don't you get taxed on profit?

I think the convo is going the wrong way anyway, yes there are some tangible benefits to VAT but the most important thing is to get your VAT right or you get in to some serious hot water. If there is a couple of extra quid for you at the end then fine. Better to look at the process and get that right than focus on FRS being a cash earner.