A couple of weeks ago I posted about the client who had to VAT registered this month and her separating her businesses... remember?
Well she emails me this evening with the below from a 'friend' of hers that she met at CHURCH!
Here goes:
You could charge 20% vat on all clients, but only pay 12% to the HMRC. (The exact % changes by industry but I think cleaning would fall under 'other activities 12%). So you would be making an extra 8% profit.
Using some rough numbers, for every £100 charged to a customer, they would now pay £120 including vat. If the commercial client is Vat registered they can claim the whole £20 vat back from the HMRC.
You would then pay £12 to the gov and keep £8.
You can apply to this scheme if your business sales are expected to be less than 150k in the coming year and you have to leave the Scheme when you are looking at 230k or more.
I believe it's set up to help cushion the blow of a business your size when it first has to start charging Vat.
The only thing you can't do is claim the VAT back on the cleaning supplies etc that you buy. So it's a trade off and you would want to look at how much you spend on VAT of your supplies.
You can still claim vat on large capital transactions over 2k so on expensive equipment etc.
Now strictly speaking he's correct with everything, but I've never heard of this happening and I'm a bit dubious about it all, is it morally right to do this?
Answers on a post card please... I'd love know your thoughts!
Its the flat rate scheme but I don't know if it applies to her type of businesses or not?
There is a long list of them on the HMRC website, its mainly aimed at service industries where there is not many purchases but a lot of sales etc. I have one client on it and we are always checking to make sure she still qualifies for the FRS.
Rob will know more about this hopefully he will be on here to advise.
Is she just trying to get out of paying the full amount of VAT per quarter perhaps?
No, its not that Amanda... She doesn't mind about going VAT reg and she will qualify for the FRS, I've already checked and she'll be at the 12% (11% FYA).
What I was questioning was if she does FRS, can she 'morally/ethically/legally' charge more more VAT and only give HMRC 11% of it and pocket the rest... to me that sounds a little dodgy! Which is why I wanted to make sure if anyone else knew about it... :/
-- Edited by ClawzCTR on Monday 27th of January 2014 10:38:40 PM
You charge your customer the full 20% and give the vat man the percentage, say 12%. This means when you buy goods and services you can't claim the vat on them. This is where that 8% comes in, it's to cover the vat on the things you buy.
It's perfectly legal and moral, but not always the best for the client, so worth doing the sums.
You're not 'really' making x% profit though. HMRC have calculated these percentages as an average of what it would be carrying out VAT procedures normally. They don't get to claim VAT back on heating and lighting or any other expenses of running the business. Or any other purchases. These are already factored into the percentage based on the business sector. Nothing dodgy about it.
__________________
Never buy black socks from a normal shop. They shaft you every time.
The logic of what they say is right but the %s are wrong
if you bill someone say £100 when you are not vat reg you keep £100
if you do the same if vat reg you charge £120
if the standard FRS % of 12% you pay 12% of the vat inclusive figure ie £14.40 (12% of £120) to the vatman and keep the rest £105.60 (so £5.60 better off per £100) or 4.66% (16.66% - 12%) off the gross figure as vat of 20% on the net is a 1/6th of the gross.
So any client who deals with only vat reg businesses the advice should be to become vat registered and go on FRS. If they are the standard 12% rate they will earn 5.6% more without doing anything or 4.48% better off after corp tax.
the extra earning has to be weighed up with the time of doing vat return. If turnover say £50k then better off by £2,240 (£50k x 4.48%) after tax which for the couple of hours of doing 4 returns a year is probably their best hourly rate of pay they will get
As has already been noted. The Flat Rate Scheme is designed to work exactly like that. HMRC envisage a small profit from operating flat rate schemes in their notes on Self Assessment Form 103 (sa103f-notes.pdf) - so you'll not pocket all the difference, there'll be tax to pay.
If you decide to record your figures:
excluding VAT, include
- in box 15 any balance on your VAT account that is not to be paid over to us (this is the amount of VAT on your income that exceeds the VAT paid on your expenses, plus the payment under the Flat Rate Scheme)
To put meat on these bones, assume turnover of £100 + VAT (£120) and expenses of £10 + VAT (£12).
Without being in the FRS this would result in a profit of £90 and VAT payable of £18.
However, under the FRS you'd only pay HMRC £14.40. Your profit would be £93.60. £100 should be recorded in Box 14 of the return, £3.60 in Box 15 and £10 in Box 16. Here's the lowdown on the £3.60 as described by HMRC above:
Amount of VAT on income
20.00
VAT Paid on expenses
(2.00)
Payment under the flat rate scheme
(14.40)
Box 15 Any other business income not included in box 14
3.60
It is also possible for small losses to arise under FRS. Again, HMRC provide advice in sa103f-notes.pdf. The VAT loss should be recorded in Box 29 (...net VAT payments).
If expenses had been £30 + VAT (£36) the profit would become £69.60 (£100 in Box 14, £30 in Box 16 and £0.40 in Box 29). The table above would become:
Amount of VAT on income
20.00
VAT Paid on expenses
(6.00)
Payment under the flat rate scheme
(14.40)
Box 29 ...net VAT payments
(0.40)
It's all about the "average" percentages established for each type of business and how representative those are for your particular operation.
the extra earning has to be weighed up with the time of doing vat return. If turnover say £50k then better off by £2,240 (£50k x 4.48%) after tax which for the couple of hours of doing 4 returns a year is probably their best hourly rate of pay they will get
Don't forget that they'll not be able to recover any VAT on expenditure so the hourly rate isn't quite as good as it may seem!!!
the extra earning has to be weighed up with the time of doing vat return. If turnover say £50k then better off by £2,240 (£50k x 4.48%) after tax which for the couple of hours of doing 4 returns a year is probably their best hourly rate of pay they will get
Don't forget that they'll not be able to recover any VAT on expenditure so the hourly rate isn't quite as good as it may seem!!!
but at £50k they wouldnt be reclaiming vat anyway as they wouldn't be vat registered without the cash benefit of the FRS
but at £50k they wouldnt be reclaiming vat anyway as they wouldn't be vat registered without the cash benefit of the FRS
Warning: oversimplifications follow!!!
Assume a business under the threshold for mandatory VAT registration - say £50k
I'd always thought of the decision to register for VAT or not as decision number one (What will the extra 20% VAT mean for the business? Will it have to reduce prices to stay competitive? etc.)
If it looks worthwhile to register for VAT, then, as with any VAT registered business within the limits of the Flat Rate Scheme, there's a second question as to whether entering the FRS would be worthwhile. Normally the answer is yes to FRS if the financial consequences of the FRS percentage work in the business's favour (my earlier £10 + VAT example), and the answer is no if the FRS percentage doesn't work in the business's favour (my earlier £30 + VAT example).
At the margins there may be some cases where the extra available under the FRS may influence the decision to register or not, but I think, for most, if they're using the FRS they'd probably be registered for VAT anyway even if FRS was not available.
Consequently, I wonder if it is entirely legitimate to compare the FRS result with the non VAT registered result - the marginal scenario.
I have a client whose turnover for many years has been below the VAT threshold but he remains VAT registered. He is also on FRS. The benefits are significant. In descending order of priority, as I see it, the issues are:
a) his customers are VAT registered so there is no downside to charging the 20% VAT
b) his customers would know that he was a small-time one-man band if he was not VAT registered. Because he is VAT registered, they do not know this (indeed many falsely assume he has to be trading over the VAT limit to be registered).
c) consistently, the "profit on FRS" amounts to several hundred pounds a year - the VAT he cannot reclaim on purchases is outweighed by the difference between VAT at 20% and his sector's FRS rate.
d) his VAT returns are simple, quick, and almost entirely risk-free.
e) his book-keeping (regardless of how he does it - Sage, spreadsheets, cloud services) is significantly simpler and quicker, and less error-prone.
As for morality: FRS VAT must be far simpler for HMRC to deal with, which saves them time and effort and therefore reduces our taxes. There is no morality problem here.
