Reply to: Reclaiming VAT and Corporation Tax under FRS

[wattaj]

Limited cost trader....

No... look once again at the question. Read it in the context of the subsequent answers. You are wrong. And you are being poorly advised given the information that you have shared thus far.

Still think that you're a troll.

[TheCyclingProgrammer]

And the 20p is liable for CT of course...


Sorry -

It’s taxable income sure, but input VAT on the FRS also becomes tax deductible. For most people the FRS surplus on the limited cost trader rate will be wiped out entirely by the input VAT on their costs meaning it will be a net loss in that respect. Even accountancy fees will likely incur more input VAT than what you’d get on the FRS.

[eek]

And the 20p is liable for CT of course...


Sorry -

Only if it's not spent...

But I really don't see what the benefit of the FRS is for most people - Freeagent does all the hard work for you so there is zero point being on the FRS as a contractor even if you had zero expenses / expenditure.

Heck you will probably be better off if your only expenditure is your accountants fees (which is why I don't think the OP has actually asked his accountant).

[malvolio]

You need to speak to your accountant again as it's 16.5% of the total income (including VAT) which works out as 19.8% of the before the Amount.

So invoice £100
VAT £20

Total received £120

16.5% of £120 = £19.80

So for every £100 of before VAT income you will receive £100.20 after FRS deductions.

Now if the first year it's 15.5% which works out as 18.6% or £101.40 after FRS deduction but it's really not worth the hassle.

Just use Freeagent and let it do all the work for you.

And the 20p is liable for CT of course...


Sorry -

[Maslins]

Well what my accountant has said that limited cost business have to pay 16.5% but in the first its reduced by 1%. If I am charging the client 20% I get to keep the 4.5% difference in the first year.

But my accountant said I have the option to go under standard rate in the future if my expenses start to creep up.

The 16.5% (or 15.5% for first year) is on the GROSS amount, so you don't pocket anywhere near 4.5%.

Simple example:
You invoice £1,000+VAT = £1,200.
15.5% of £1,200 = £186 VAT paid to HMRC.
So in first year, you pocket £14 output VAT for every £1,000 net invoiced. This is before factoring in not being able to reclaim VAT on your purchases.

When you're outside your first year, 16.5% of £1,200 = £198, so you're pocketing just £2 per £1,000 net invoiced. Again this is before factoring in losing ability to reclaim VAT on your purchases.

If your accountant did calculations and told you you'll be 4.5% better off under FRS, I don't see any possible way that could be correct. I would imagine you've probably got the wrong end of the stick.

(EDIT - I'm slow, eek beat me to it!)

[Amanensia]

You need to speak to your accountant again as it's 16.5% of the total income (including VAT) which works out as 19.8% of the before the Amount.

So invoice £100
VAT £20

Total received £120

16.5% of £120 = £19.80

So for every £100 of before VAT income you will receive £100.20 after FRS deductions.

Now if the first year it's 15.5% which works out as 18.6% or £101.40 after FRS deduction but it's really not worth the hassle.

Just use Freeagent and let it do all the work for you.

This.

The percentages are deliberately published the way they are so people will react precisely as the OP has.

[eek]

Well what my accountant has said that limited cost business have to pay 16.5% but in the first its reduced by 1%. If I am charging the client 20% I get to keep the 4.5% difference in the first year.

You need to speak to your accountant again as it's 16.5% of the total income (including VAT) which works out as 19.8% of the before amount.

So invoice £100
VAT £20

Total received £120

16.5% of £120 = £19.80

So for every £100 of before VAT income you will receive £100.20 after FRS deductions.

Now if the first year it's 15.5% which works out as 18.6% or £101.40 after FRS deduction but it's really not worth the hassle.

Just use Freeagent and let it do all the work for you.

[80211]

That's not 4.5% IIRC.

Well what my accountant has said that limited cost business have to pay 16.5% but in the first its reduced by 1%. If I am charging the client 20% I get to keep the 4.5% difference in the first year.

But my accountant said I have the option to go under standard rate in the future if my expenses start to creep up.

[ladymuck]

Maybe worth it for year 1 but you'll soon find you'll be losing out

[80211]

Which FRS VAT category are you using and what is your SIC code?

Limited cost trader....

[wattaj]

Which FRS VAT category are you using and what is your SIC code?

[80211]

If you buy a £1k+VAT = £1.2k gross PC today, register for VAT tomorrow, then even if you go on FRS immediately you'd still be able to reclaim the VAT on your PC purchase.

Irrespective of what you do VAT-wise, your company will get CT relief. The only difference will be whether the CT relief is on the £1k net of VAT cost (if you can reclaim the VAT), or £1.2k gross cost (if you can't).

It is of course better to get the full £200 VAT back, than not be able to and get CT relief on that extra £200.

However, ignoring this one isolated transaction:
1) as TCP suggests, is the FRS really going to be beneficial for you?
2) whilst it is good to understand the basics of how taxes work, it's not worth getting too bogged down in individual transactions and trying to time things perfectly from a tax perspective. Focus on what's best for your business. Buy the PC if/when you need it.

Thank you so much for taking the time to explain. Much appreciated.

This makes sense to me now.

And you are right in saying that I should make purchase as and when required rather than timing it but i was also trying to make it efficient if I can. Unfortunately, the pc I want to buy won't be released until November and having done a simple calculation, I am better of registering now under FRS to get 4.5% difference and not claim the PC VAT in the future.

Also, I guess timing pf VAT registration would matter more if a business has to procure a lot of goods unlike myself who just needs some equipment.

With regards to FRS, my accountant did the calculations and said I will be keeping 4.5% under FRS which in the long run is beneficial when compared to claiming vat under standard rate for my expenses. So I am going with that.

Best,
V

[Maslins]

If you buy a £1k+VAT = £1.2k gross PC today, register for VAT tomorrow, then even if you go on FRS immediately you'd still be able to reclaim the VAT on your PC purchase.

Irrespective of what you do VAT-wise, your company will get CT relief. The only difference will be whether the CT relief is on the £1k net of VAT cost (if you can reclaim the VAT), or £1.2k gross cost (if you can't).

It is of course better to get the full £200 VAT back, than not be able to and get CT relief on that extra £200.

However, ignoring this one isolated transaction:
1) as TCP suggests, is the FRS really going to be beneficial for you?
2) whilst it is good to understand the basics of how taxes work, it's not worth getting too bogged down in individual transactions and trying to time things perfectly from a tax perspective. Focus on what's best for your business. Buy the PC if/when you need it.

[wattaj]

I'm calling it early: troll.

Next.

[eek]

Thanks for your response.
So if I were to register for standard VAT, does that mean I can then reclaim VAT @20% and corporation tax relief?

But what happens if I were to purchase this item pre-VAT FRS registration. Can I still reclaim VAT and Corporation tax relief?

Best,
V

What do you mean by Corporation tax relief?

Go and read the First timers guide and find an accountant as belief me given your questions you will need one.