Reply to: Limted company on flat rate scheme

[Newbie Simon]

Thanks TheFaQQer

Hourly rate inclusive of VAT:-

£8.33+VAT=£10
£10-£1.35-CT=£6.92

Hourly rate exclusive of VAT:-

£10+VAT=£12
£12-£1.62-CT=£8.30

Looks like my accountant has got it wrong

[TheFaQQer]

The agency has said it excludes VAT, they also take 10% so every £10 they make £1

So, you invoice £10 + VAT per hour = £12

You then pay £1.74 of that to HMRC, assuming you are on the FRS rate of 14.5%

So your company earns £10.26 per hour because of the FRS profit, and pays corporation tax on that, leaving you with £8.21 an hour.

If your rate is 13.5% (as you mention earlier), then you pay over £1.62 for each hour worked, have profit of £10.38 an hour, and after corporation tax are left with £8.304 an hour.

If you are clear to your accountant about your rate being exclusive of VAT, and they are doing it wrong, then you need to change your accountants quickly before anything else gets messed up.

[northernladuk]

The agency has said it excludes VAT, they also take 10% so every £10 they make £1

Well now you know you have the opportunity to negotiate it down to 6% at next renewal. Saying that am not sure what the agency take is relevant here. They get a figure from the client, take a cut and then pay you the rate agreed... Or they should be!!

[Newbie Simon]

The agency has said it excludes VAT, they also take 10% so every £10 they make £1

[Jessica@WhiteFieldTax]

Let's say I earn £10 per hour and worked 1000 hours total banked would be £10000 (gross) VAT is £1666.67 and net £8333.33.

Its all speculation unless you are clear whether the £10 an hour is vat inclusive or vat exclusive.

[TheCyclingProgrammer]

This might seem pedantic, but strictly speaking the £8650 is your gross profit (assuming no direct cost of sales) - you won't necessarily pay tax on all of this as you need to deduct your operating costs, which includes any input VAT if you are on the FRS.

If you want to look at a single invoice in isolation, you at least need to consider the costs attributable to that invoice and figure out your net profit. This could be your salary for the period the invoice covers, travel expenses etc.

[Contreras]

I am not sure my accountant is working my VAT return correctly.

Let's say I earn £10 per hour and worked 1000 hours total banked would be £10000 (gross) VAT is £1666.67 and net £8333.33.

£10000x13.5%=£1350
VAT flat rate profit=£316.67

Shouldn't it be VAT on £10k which is £2000-£1350=£650 for the VAT flat rate profit?

Your accountant has it right, although some of the terminology may have been lost in translation.

Rates are normally quoted as net + VAT.

YourCo sells your services at £8.33 per hour + VAT.

1000 hours x £8.33 + VAT

= £8,330 + £1,666

= £9,996 gross. (let's say £10k for simplicity)

Flat rate turnover is the gross amount, and say your scheme is at 13.5%:

£10,000 x 13.5%

= £1,350 VAT owed to HMRC.

Turnover for YourCo is: £8,330 + £1,666 - £1,350

= £8,650 (YourCo will pay 20% CT on this amount)

If YourCo was not on the FRS, it would still invoice £8,330 + VAT, but the whole £1,666 VAT would be owed to HMRC leaving YourCo with £8,330.

Hence £8,650 - £8,330 = £320 "flat rate profit".

[northernladuk]

A spreadsheet?

Or stop being a cheapskate and get a FreeAgent, Xero, or Kashflow account (I'd recommend FreeAgent). It will cost you about one day's work.

Absolutely this. Why rely on something free when there is money to be lost getting it wrong? Better still you've already got grounds to leave your accountant cause you don't trust him so go find another that gives free agent as part of the deal.

[TheCyclingProgrammer]

but it is subject to Corp Tax as a taxable gain.

Flat rate VAT surplus is best thought of gross profit from being on the scheme, but not taxable profit necessarily.

To calculate your net profit from the scheme, you need to deduct the cost of being on the scheme - your total input VAT which cannot be reclaimed (except on certain capital purchases).

Annual FRS surplus - annual input VAT = scheme net profit (or loss).

[TestMangler]

Best not to count VAT as a true tax, it's more like tax-collected, it was never yours. it was never part of your daily rate, not part of your income figure.

This ^^

[meridian]

I am not sure my accountant is working my VAT return correctly.

Let's say I earn £10 per hour and worked 1000 hours total banked would be £10000 (gross) VAT is £1666.67 and net £8333.33.

£10000x13.5%=£1350
VAT flat rate profit=£316.67

Shouldn't it be VAT on £10k which is £2000-£1350=£650 for the VAT flat rate profit?

You seem to be confusing things by saying £10k gross in your first example, and then VAT on £10k in your second.

Assuming that the £10k is VAT-inclusive, and assuming your Flat Rate is 13.5%, then your first example is correct. It's not "profit" in the true sense, but it is subject to Corp Tax as a taxable gain.

[Newbie Simon]

I am not sure my accountant is working my VAT return correctly.

Let's say I earn £10 per hour and worked 1000 hours total banked would be £10000 (gross) VAT is £1666.67 and net £8333.33.

£10000x13.5%=£1350
VAT flat rate profit=£316.67

Shouldn't it be VAT on £10k which is £2000-£1350=£650 for the VAT flat rate profit?

[Alan @ BroomeAffinity]

Newbie simon, if you want a spreadsheet to track your tax, PM me your email address and I'll send you one tomorrow. 15% of your gross probably isn't too far off the mark if you're a relatively low earner.

[Bacchus]

It will cost you about one day's work.

with or without VAT?

[TheCyclingProgrammer]

Best not to count VAT as a true tax, it's more like tax-collected, it was never yours. it was never part of your daily rate, not part of your income figure.

Strictly speaking if you're on the FRS it's better to think of the VAT as part of your turnover and the flat rate as a tax on it.