Short term FRS switch

[d000hg]

Ever since I started contracting, my income has nearly all come from outside the UK, predominantly the USA, and has thus been VAT-exempt. As such it was better not to be in the FRS so I could reclaim VAT on accountancy, etc.

Since August, I'm now working 90% for a UK company and am charging them 20% VAT of course. So I wondered if I can switch to FRS while this contract is happening - to the end of this year is the current end-date - and then revert to FRS mid-year?

If so can I back-date the switch to the last VAT date or some point after that (I haven't submitted the current June-August return yet)?

I have one question about how the FRS works if I still have some VAT-exempt income coming in. Does FRS simply apply a flat rate to the company's total gross income, or only those parts which are VAT-eligible? For instance if I bill a UK client £4000 + £800VAT and a US client £1000, do I pay 14% of £4800 or £5800?

I'd ask my accountant directly but they hang around here so it might help someone else to see the answer.

Working out how much VAT you need to pay using your flat rate percentage
You calculate your VAT payable to HMRC by applying your flat rate VAT percentage to your 'flat rate turnover'. If you are still in your first year of VAT registration, remember to reduce your flat rate percentage by one.

Your flat rate turnover is all the supplies your business makes including all:

• VAT inclusive sales for standard rate, zero rate and reduced rate supplies

• sales of exempt supplies, such as rent or lottery commission - you don't have to make any partial exemption calculations
• sales of capital expenditure goods - unless you have previously reclaimed the VAT, in which case they must be accounted for at the standard rate and not the flat rate.
• sales to other EU countries
• sales of second-hand goods - but if you sell a lot of these, you may be better off leaving the Flat Rate Scheme and using a margin scheme

Don't include:

• services you've purchased from outside the UK that you've had to reverse charge
• disbursements - costs you pass on to your clients that meet the necessary VAT conditions
• private income, for example income from shares
• bank interest received on a business account
• the proceeds from the sale of goods you own but which have not been used in your business
• any sales of gold that are covered by the VAT Act, Section 55 - see the link below
• non-business income and any supplies outside the scope of UK VAT
• sales of capital expenditure goods on which you have claimed back the VAT you paid

[Maslins]

I think once you join the FRS you have to stay on it for at least 12 months. Guess they do this so people don't organise all their big VATable bills to be annual, using FRS for 9 months then one month off to reclaim all the VAT.

Re your other query, this is where accountants get told off for being pedantic, but actually it's very important...Your US sales are NOT exempt from UK VAT, they're outside the scope of UK VAT. Sounds similar, and doesn't make much difference to the invoices you send as you don't add any VAT on either way. But it makes a massive difference to how much you pay over under FRS. You won't need to pay over FRS on the US sales (good news for you) whereas you would have to pay over FRS if you had any exempt sales (which is unlikely).

[jamesbrown]

Interesting question, as I'm in a near identical position. I was planning to purchase some computer equipment <2k and then switch over to FRS as I have some concurrent income from the UK now. Unless you have a lot of purchases <2k, the break-even point for benefiting from the FRS is pretty low. I think you can leave the FRS at any time, but you can't rejoin for 12 months. It doesn't automatically follow that the place of supply is the US, but assuming it is (and it probably is), your income from the US would be outside of the scope of UK VAT and wouldn't, therefore, appear in any VAT calculations under the standard scheme or FRS.

[d000hg]

Re your other query, this is where accountants get told off for being pedantic, but actually it's very important...Your US sales are NOT exempt from UK VAT, they're outside the scope of UK VAT. Sounds similar, and doesn't make much difference to the invoices you send as you don't add any VAT on either way. But it makes a massive difference to how much you pay over under FRS. You won't need to pay over FRS on the US sales (good news for you) whereas you would have to pay over FRS if you had any exempt sales (which is unlikely).

Yes good point.

I have income from both USA and the EU but I believe both fall out of VAT under the 'place of supply' rules. Which makes it sound nice for my purposes, although I'm a bit suspicious of anything that seems so convenient...