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Flat Rate Scheme

The Flat Rate VAT Scheme is a popular scheme for Freelancers and Contractors.

The aim of the flat rate VAT scheme is to make your VAT administration simpler, allowing you to run your freelancing business easier.

You charge VAT on your invoices at 20% (2012) you can not reclaim VAT on your expenses (input VAT) but instead you pay a reduced rate over to HMRC which is dependent on your trade.

For example IT contractors (2012) using flat rate VAT, pay FRS vat in their first year at 13.5% (there is a 1% discount in the first year) then 14.5% in subsequent years. This should provide you with substantially more income per year, and is the best scheme for most Freelancers and Contractors. But you must be aware that there are certain pit falls which could cost you money. For example if you have lots of VAT chargeable expenses or you subcontract work, you will miss out on reclaiming VAT.

You also need to be aware that if your turnover exceeds £150,000 in the first year you will not be eligible to join the flat rate VAT scheme and in subsequent years if your turnover exceeds £230,000 of VAT inclusive revenue then you must come off the scheme.

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