Beware the Pitfalls of the Flat Rate Scheme!
The Flat Rate Scheme (“FRS”) offers a simple and usually cost effective way of calculating a business’ VAT liability. However before committing to joining the FRS a business needs to consider future expenditure. The scheme does not allow for separate recover of VAT incurred on expenditure unless a capital item has been purchased that cost more than £2,000. This excludes all VAT incurred on services. Normally this would not be an issue, however out of the ordinary expenditure could prove costly, including:
– building works (services not goods)
– software upgrades (usually services not goods)
– professional fees incurred on property transactions
Therefore, if a business considers that substantial costs may be incurred on the likes of any of the above, the benefits of joining the scheme need to be weighed up against the lost VAT recovery. Similarly, if already on the scheme, it may be possible to come out of it prior to any large expenditure. When in doubt…take advice!