I have a client providing mainly labour through a personal service company who is not at present on the flat rate scheme. Occasionally he is asked to provide large items of materials to a customer upon which he both reclaims any VAT incurred and, being a standard-rated supply, charges his customer VAT. Signing up to the flat rate scheme would not in my opinion be appropriate for these reasons.
A mate down the pub has suggested to him that he forms a second company to provide the labour side of his business and sign up for the flat rate scheme. He'd carry on the rest of the business under existing arrangements. Needless to say the "profit" on the flat rate scheme would amount to a few thousand pounds. I've already intimated that I'm not into what appears to be an artificial splitting of the business but would be grateful if anyone has had experience of this situation or can give any opinion.