Reply to: Quantifying FRS Benefits

[BolshieBastard]

I think that stating that being registered VAT gives HMRC another avenue to investigate you is a bit on the paranoid side to be honest.

To me the biggest win with the FRS is the simplified accounting, not the "free" money. Obviously being on the FRS results in there being a surplus but of course the point of the surplus is to cover any input VAT on expenses that would have normally been recovered on the standard scheme.

Its really quite simple...if the input VAT on your expenses exceeds your FRS surplus (i.e. you make a lot of large VATable expenses) then you shouldn't be on the FRS. For most contractors, the FRS surplus should exceed the VAT on their expenses therefore leaving over some left over profit.

Paranoid? Are you serious? If you arent registered for VAT it is one thing less they can investigate on. Fact!

I do agree the benefit of FRS is simplified accounting rather than 'free' money. And I think you may find most contractors will;

buy a new laptop \ pc perhaps once a year
claim the VAT element on fuel
undertake some form of trainging either via a residential type course or other means once a year
will have some professional services such as accountancy, contract reviews once a year.

When the unclaimable VAT element is offset against the FRS scheme, the benefit is severely eroded.

[XLMonkey]

1200? Are you using the 'right' percentages?

Although Im currently on the FRS, I cannot claim the VAT element on any fuel I use or my accountants fees (yes I could do that myself. Well Actually no I couldnt then there's the 'my time' element which is immeasurable) or training material I purchase.

By the time you take out that VAT element from even the 1200, Id reckon there'd be about 600 quid 'freemoney' as you call it.

And you're still giving HMRC an avenue to investigate you \ your co so its not really for 'doing nothing' is it?

Its not really worth it IMO.

yep, definitely using the right percentages.

You benefit if your recoverable VAT is less than the gain you make on turnover. Generally, most contracting companies have recoverable VAT on less than 5,000 GBP of expenses pa. (go on, try to add up accountancy, training, stationery etc to more than this, its not easy).

So, on the flat rate scheme, you might lose 17.5% of 5,000 = 875
and you would gain 4.5% of your VAT inclusive turnover = ???

a quick calc shows that you would be a winner if your VAT inclusive turnover is > 19,210.

I definitely bill more than this.

Re. VAT investigation - don't think that there's any reason to think that you are more likely to be investigated if you are on the FRS rather than off it. VAT investigations tend to get triggered by missing a deadline, rather than fitting a profile.

[ctdctd]

BolshieBastard, FRS is "free" money for the average IT contractor who has little or no VAT to claim back.

Example:- 50K turnover ex VAT, 17.5% VAT, 13% FRS rate.
VAT charged = 8750
VAT paid to HMRC = 47K x 0.13 = 7637.5

VAT profit - 1112.5
After corp tax - 878.88

And the more you can charge, the more you make off the VAT

Calculations are trivial - just work out the above once a quarter, type into online VAT, and send the payment. No need to do a full VAT breakdown or trouble an accountant!

[OrangeHopper]

Removed.

[TheCyclingProgrammer]

By way of example, my current FRS surplus for the year stands at £921. However I have made a lot of supplies that are outside the scope of VAT (US clients, iPhone software sales etc.). For a contractor for whom the majority of work is within the scope of UK VAT (e.g. UK clients) then this would be higher.

Now, I don't know how much input VAT I've paid on my expenses for the year but if for arguments sake we ignore any expenses that might be zero-rated or VAT exempt, then I'd estimate that unrecoverable VAT portion of my expenses to date is no more than £270 meaning I've benefitted from being on the FRS to the tune of £650 (or £513 after corp. tax) plus the simplified accounting that comes with it.*

Seems like a no-brainer to me, unless you're worried about HMRC being out to get you.

*its worth noting I'm in my first year so have benefitted from an extra 1% discount but I'd still expect to turn a profit from being the FRS despite this.

[TheCyclingProgrammer]

I think that stating that being registered VAT gives HMRC another avenue to investigate you is a bit on the paranoid side to be honest.

To me the biggest win with the FRS is the simplified accounting, not the "free" money. Obviously being on the FRS results in there being a surplus but of course the point of the surplus is to cover any input VAT on expenses that would have normally been recovered on the standard scheme.

Its really quite simple...if the input VAT on your expenses exceeds your FRS surplus (i.e. you make a lot of large VATable expenses) then you shouldn't be on the FRS. For most contractors, the FRS surplus should exceed the VAT on their expenses therefore leaving over some left over profit.

[BolshieBastard]

Yes, I did. I acknowledged that in my second post above. It's just extra profit for your limited co. And so the money that you have to shell-out to take out the profit would have to go through the normal process and taxes (Salary -> PAYE, NIC etc, Divvy -> CT etc), but would depend upon your specific circumstances, like the total profit made by yourco in the financial year (for ex, if the latter is too low, you might be able to extract your extra 'savings' for free).

Sorry, didn't quite get that. Cann't see why is it not a benefit, if it gives a couple of hundred quids, without any additional effort, unless making money is not the motive of your business.


That went completely over the top. How does being VAT/FRS registered effect your IR35 status? In fact, I would think that being VAT registered would make yourCo look more like a legitimate business, rather than a tax-efficient way to provide employee services to an employer. And the money saved using FRS is legitimate profit, made using the laid down process. HMRC is just discounting a part of tax collected by your business for them, and in return asking you not to claim VAT on your supplies (unless it exceeds a threshold), saving both you and them loads of accounting.

Extra profit that is taxed. Therefore this reduces the amount of this 'free money' you mention.

Is it a 'benefit'? Is there such a thing as a free lunch? As I said, being on the FRS means you cant claim for any incidental VAT costs (unless its over 2 grand).

So, that you cannot reclaim VAT off the PC \ Laptop you purchased. It means you cannot reclaim the VAT off any training material \ business related books you may purchase. It means you cannot reclaim the VAT element on your fuel irrespective of the 24 month rule. It means you cannot reclaim VAT for any professional services such as accountants \ having your contracts iR35 reviewed.

Its all beginning to mount up now (or should that be whittled away) isnt it?

My point about being FRS or any VAT scheme registered is that it gives HMRC another avenue to open up an investigation, be that VAT, PAYE or IR35. To think HMRC would not use any tactic at their disposal beggars believe.

That 'free money' doesnt look so 'free' now does it?

[BolshieBastard]

You're right that the gain on the Flat Rate Scheme is subject to corporation tax (and then income tax when it gets to you). But... its still free money, and it does add up.

I track it as a separate income line in my accounts, which show that it made the company just over 1,200 last tax year.... not riches, but not bad for doing nothing.

1200? Are you using the 'right' percentages?

Although Im currently on the FRS, I cannot claim the VAT element on any fuel I use or my accountants fees (yes I could do that myself. Well Actually no I couldnt then there's the 'my time' element which is immeasurable) or training material I purchase.

By the time you take out that VAT element from even the 1200, Id reckon there'd be about 600 quid 'freemoney' as you call it.

And you're still giving HMRC an avenue to investigate you \ your co so its not really for 'doing nothing' is it?

Its not really worth it IMO.

[explorer]

Did you take into account the fact that any extra 'savings' you make from being on the FRS is included in the calculation for corporation tax as well?

Yes, I did. I acknowledged that in my second post above. It's just extra profit for your limited co. And so the money that you have to shell-out to take out the profit would have to go through the normal process and taxes (Salary -> PAYE, NIC etc, Divvy -> CT etc), but would depend upon your specific circumstances, like the total profit made by yourco in the financial year (for ex, if the latter is too low, you might be able to extract your extra 'savings' for free).

I seriously doubt there is any real benefit of being on the FRS (or any one of the other VAT scams schemes unless you are over the threshold.

Sorry, didn't quite get that. Cann't see why is it not a benefit, if it gives a couple of hundred quids, without any additional effort, unless making money is not the motive of your business.

In fact, I think it just gives HMRC another reason to investigate your co. Im in the process of closing down my ltd co and starting up a new one to lessen the possibility of an IR35 investigation. Not registering for VAT by managing my income to be under the registration threshold will give the slimey bastards one less chance of opening an investigation in the new co.

That went completely over the top. How does being VAT/FRS registered effect your IR35 status? In fact, I would think that being VAT registered would make yourCo look more like a legitimate business, rather than a tax-efficient way to provide employee services to an employer. And the money saved using FRS is legitimate profit, made using the laid down process. HMRC is just discounting a part of tax collected by your business for them, and in return asking you not to claim VAT on your supplies (unless it exceeds a threshold), saving both you and them loads of accounting.

[TheCyclingProgrammer]

Linky please??

I'm just thinking loud here, but being caught by IR35 would mean that the realationship between yourself and the client was that of an employee (in disguise), and an employer, rather than that which exists between two businesses. My question is, in those circumstances, are you allowed to take out ANY profits (from the IR35 caught contract), the divvy way? Or if you have already extracted divvy, isn't that treated as salary, and taxed accordingly, and if so, the extra savings by virtue of FRS are treated no differently than the rest of yourCo profit.

OrangeHopper posted this the other day:

http://forums.contractoruk.com/accou...-accounts.html

See "Service companies legislation" here:
http://www.hmrc.gov.uk/manuals/bimmanual/BIM31585.htm

Note that the wording is a bit confusing although the example makes it clearer. When it says the "deemed payment calculation" is the VAT exclusive amount, it means the the gross value minus the flat-rate VAT amount, which means the remainder (your FRS surplus) is included in the deemed payment calculation.

However, because you cannot recover input VAT when on the FRS, any VAT on allowable expenses is also allowable when working out the profit.

[TheCyclingProgrammer]

I would call it a little extra "saving", rather than extra "income", and yes, since it goes to be a part of yourCo's gross profit, I would think that normal profit taxation rules apply (CT etc). However, can remember someone's post, not too long ago, suggesting that this "profit" HAS to be disbursed the PAYE way, and not via divvy. Couldn't find any ruling implying that on HMRC's site, though...Anyone, any ideas?

FRS surplus is normal profit and taxed accordingly; I believe you only have to distribute FRS surplus through PAYE if it has come from an IR35-caught contract.

[explorer]

If you are caught by IR35 then any FSR saving on that income must distributed be through PAYE.

Otherwise it is simply another profit item on the profit & loss sheet and subject to company tax.

PS. Any advice I give can be wrong and often is.

Linky please??

I'm just thinking loud here, but being caught by IR35 would mean that the realationship between yourself and the client was that of an employee (in disguise), and an employer, rather than that which exists between two businesses. My question is, in those circumstances, are you allowed to take out ANY profits (from the IR35 caught contract), the divvy way? Or if you have already extracted divvy, isn't that treated as salary, and taxed accordingly, and if so, the extra savings by virtue of FRS are treated no differently than the rest of yourCo profit.

[XLMonkey]

Did you take into account the fact that any extra 'savings' you make from being on the FRS is included in the calculation for corporation tax as well?

I seriously doubt there is any real benefit of being on the FRS (or any one of the other VAT scams schemes unless you are over the threshold.

You're right that the gain on the Flat Rate Scheme is subject to corporation tax (and then income tax when it gets to you). But... its still free money, and it does add up.

I track it as a separate income line in my accounts, which show that it made the company just over 1,200 last tax year.... not riches, but not bad for doing nothing.

[BolshieBastard]

Time and again a new thread appears, asking if we are better-off being on FRS. Just did some basic maths, and here are the facts:

1. In any period of time, you save 2.225% of your (ex VAT) invoice amt, by being on FRS (assuming negligible expenses), i.e., you can multiply your invoce amt (ex VAT) by .02225 to arrive at a figure giving you the amount of money you saved by being on FRS. work out your average expenses in the same period, deduct from the figure obtained above, and see for yourself if you benefit by being on FRS.

2. The percentage and the multiplier, if you are in the first year of yourCo formation, are 3.4% and .034, respectively.

3. The figures, when the VAT and FRS rate were 15% and 11.5% respectively, were 2.925%/0.02925 during the first year of a company's formation, and 1.775% and .01775 afterwards.

So, the new year has brought-in some extra effortless savings for us contractors. we are better off by 0.45% (2.225-1.775) of your ex VAT billing amount in any given period of time, if on FRS.

Happy new year Guys..

Did you take into account the fact that any extra 'savings' you make from being on the FRS is included in the calculation for corporation tax as well?

I seriously doubt there is any real benefit of being on the FRS (or any one of the other VAT scams schemes unless you are over the threshold.

In fact, I think it just gives HMRC another reason to investigate your co. Im in the process of closing down my ltd co and starting up a new one to lessen the possibility of an IR35 investigation. Not registering for VAT by managing my income to be under the registration threshold will give the slimey bastards one less chance of opening an investigation in the new co.

[OrangeHopper]

If you are caught by IR35 then any FSR saving on that income must distributed be through PAYE.

Otherwise it is simply another profit item on the profit & loss sheet and subject to company tax.

PS. Any advice I give can be wrong and often is.