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VAT TIP: Flat Rate Scheme

We all know for the first year of being VAT Registered

you benefit from 1% discount on your FRS Rate.

But do you know how this can be extended?


An example:

Chris Productions Ltd registers for VAT on 1 August 2013 and registers for the FRS on the same day. The business category is 'Any other activity not listed elsewhere' and so the FRS percentage is 12%, discounted to 11% for 12 mths.

Chris decides to use Cash Based Turnover Method so he accounts for the company's VAT liability when it receives payment from his customer, not when he invoices them. Great, because his customers takes an average of 65 days to pay.

Chris Productions Ltd ticks along quite nicely for 12 months completing his VAT Returns for the first four quarters up to 31 July 2014 all using the 11% discounted FRS Rate. Obviously from 1 August 2014 all his payments to HMRC will be at 12% of whatever he receives rather than 11%.

WRONG

Under he Cash Based Turnover Method you account for your VAT liability when you receive payment BUT it does not affect the time of supply (tax point). Chris should apply the rate that was in place at the time of supply and not the rate that is in place when payment is received.

If his customer pays him on 4 October 2014 for goods delivered and invoiced on 31 July 2014 then Chris should use the rate that was in place at that point, 11% not 12%. If the customer paid later the the average, say on 31 October 2014, Chris would still pay HMRC using the discounted FRS rate even though this is 15 months after first registering for VAT.

The logic is sound - you get 1% discount on your first 12 months sales - regardless of whether you are on the Cash Based Turnover Method or the Standard Method of Accounting under the FRS.

VAT TIP: Use the FRS rate in force at the time of supply to make sure you don't overpay your VAT