VAT Flat Rate Sceme

VAT Flat Rate Sceme

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Can someone help me re this as I am confused as a new client has told me of contractors in the roofing industry registering for VAT flat rate scheme and continually getting repayments as they don't buy materials but charge VAT at 20% on their labour!  The flat rate scheme is 14.5% for construction so they are effectively reclaiming the difference... Can't be right.

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By claudialowe
18th Jun 2014 13:19

It's not......

For example -

Turnover £1,000.00 + VAT = £1,200.00 x 14% FRS = £168.00 payable to HMRC instead of £200.00.  However that £32.00 VAT could easily be swallowed up diesel alone.

 

As far as I am aware there are NO flat rate schemes with a negative % rate, which would be the only way to get a refund (ignoring qualifying capital purchases).

 

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Replying to andy.partridge:
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By grahamstone1
18th Jun 2014 13:37

Thanks for that. I need to go back to client but from what I gather the refunds are the difference between the 20% charged on invoices and 14.5% declared to HMRC.

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Locutus of Borg
By Locutus
18th Jun 2014 14:08

VAT repayments?

I presume you mean the contractors are keeping the difference of 5.5% (20% - 14.5%) rather than getting VAT repayments from HMRC.

Yes, that is how the Flat Rate Scheme works.

The downside with it, is that you can't reclaim VAT on your costs, other than capital equipment costing more than £2,000.  However, if you don't have much in the way of costs then that downside isn't very big.

So it would be quite unusual to get a VAT repayment under FRS, but FRS is particularly beneficial in cases where there is little input VAT that could otherwise be claimed on the "normal" scheme.

EDIT: As Basil correctly points out below, the first line of my response is an over-simplification, since 20% is charged on the net, whereas the 14.5% is charged on the gross - so the maximum real benefit would not be as high as 5.5%.

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Replying to DuncanM:
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By WongR
18th Jun 2014 13:54

Right - but wrong calc

Locutus wrote:

I presume you mean the contractors are keeping the difference of 5.5% (20% - 14.5%) rather than getting VAT repayments from HMRC.

Yes, that is how the Flat Rate Scheme works.

The downside with it, is that you can't reclaim VAT on your costs, other than capital equipment costing more than £2,000.  However, if you don't have much in the way of costs then that downside isn't very big.

So it would be quite unusual to get a VAT repayment under FRS, but FRS is particularly beneficial in cases where there is little input VAT that could otherwise be claimed on the "normal" scheme.

 

 

Your calculations are out.  The VAT savings should be 2.16% of gross takings.  Given there would be input vat reclaimable on diesel, small tools etc, the savings gained would normally be very small.

 

(My calcs go with 20%/120% = 16.666% which is the true VAT rate to compare with the VAT Flat Rate Scheme which is calculated based on Gross Takings)

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