Flat Rate VAT Questions

[knight007]

I am confused about Flat Rate VAT.
It seems that for the IT Sector the percentage is 14.5% so out of the 20% your company gets to hold onto 5.5 %.

I have also read that when you are on the Flat Rate scheme, you cannot claim back VAT on purchases.
Does this include Expenses or does this only apply to assets such as new office furniture?

e.g. If I have a hotel bill expense of £100 + VAT then do I subtract £100 or £120 when calculating the income that gets taxed?

What about expenses such as car mileage, do I claim VAT on that while on flat rate?

[Clare@InTouch]

You don't get to keep 5.5% - the VAT you charge is on your net, but the VAT you pay HMRC is based on your gross.

Say you raise an invoice for £100, you'll add on VAT of 20% = £120 then pay HMRC 14.5% of that = £17.40. Don't forget you get a 1% discount in your first year too.

You cannot claim VAT on expenses, which would include mileage, only on capital assets costing over £2,000. Things like computer equipment etc. If you have a hotel bill of £120 then that whole £120 is a tax deductible expense as you're not claiming the VAT back on it.

Generally the flat rate is in your favour as long as you're only billing in the UK, and you'll have low purchases. If you're unsure just ask your accountant to do a comparison for you so you can see the difference.

[DaveB]

I am confused about Flat Rate VAT.
It seems that for the IT Sector the percentage is 14.5% so out of the 20% your company gets to hold onto 5.5 %.

I have also read that when you are on the Flat Rate scheme, you cannot claim back VAT on purchases.
Does this include Expenses or does this only apply to assets such as new office furniture?

e.g. If I have a hotel bill expense of £100 + VAT then do I subtract £100 or £120 when calculating the income that gets taxed?

What about expenses such as car mileage, do I claim VAT on that while on flat rate?

Your FRS percentage depends on what you do. Pick the category the most closely matches that, but yes, most people seem to be on 14.5%

You don't just pay 14.5% VAT instead of 20%. Rather than charging 20% on your invoice and paying that straight to HMRC you charge 20% on the invoice and they pay HMRC 14.5% of the invoice total *including the VAT*.

On a £6000 invoice you would charge 20% VAT for a total of £7200. You then pay 14.5% of that £7200 to HMRC which is £1044 rather than £1200.

You cannot claim back VAT on any expenditure unless it is for a single capital purchase of over £2000 (this can include multiple items as long as they are all on the same invoice and the total is over £2000 inc VAT)

For anything else you spend that includes a VAT compenent, you dont claim back the VAT. So your Hotel bill will be £120, you claim £120 back from your Ltd on expenses (assuming you paid for it yourself) and the company sets that £120 against CT. There is no reclamation of the VAT.

Same for milage allowances. You do not claim VAT on milage expenses under the FRS.

Even after all this, unless you have very high VAT'able outgoings you should be much better off on the FRS. On the £6000 invoice above you would be £124.80 a month better off on the FRS (alowing for the extra CT you would pay on the surplus). Even more in the first year of trading as there is a 1% discount for the period.

[knight007]

thanks to both. That clarifies things perfectly.