Flat Rate VAT (FRV) Scheme

What is the Flat Rate VAT (FRV) Scheme?

Under the flat rate scheme a business calculates its VAT liability as a fixed percentage of its turnover. The percentage varies from 4 percent to 14.5 percent depending on the business sector concerned. No deduction is given for VAT incurred on expenditure; this is taken into account in setting the fixed rates. A business in its first year of VAT registration can benefit from a reduction of one percent in the applicable flat rate.

A business can join the scheme if its taxable turnover in the next 12 months is not expected to exceed £150,000. Taxable turnover for this purpose means the value of all supplies subject to VAT at the standard, reduced or zero rate. A business must leave the scheme once income exceeds £230,000 per year.

Read more about the Flat Rate VAT scheme

Setting Up Flat Rate VAT

If you are VAT registered and have chosen to use the Flat Rate scheme you will need to set up you tax details as follows:

Setup FRV Rates

The flat rate you use depends on the business sector that you belong in. The correct sector is the one that most closely describes what your business will be doing in the coming year. Brightpearl have already added the list of sectors and rates for you to select, however these may change, so you will need to keep your rate up-to-date; go to Setup > Localisation > FRV Rates to add new rates.

Check Flat Rates with HRMC

Create FRV Adjustment Code

You will need to create a nominal account for FRV adjustments; this account will be a current liability. We recommend a sales code (4000 to 4999) if you are expecting to see a benefit from the scheme.

Learn more about creating & editing nominal account codes

Set Tax Methods & Sector

Go to Setup > Company > Accounting: Tax

• Select your Tax scheme depending on where you are based.
• Select your VAT method; cash or standard.
• Select yes for Flat rate scheme.
• Specify your business Sector.
• The Rate is populated from the sector, ensure this rate is correct.
• Select the Adjustment code (see above).
• Enter the date you became VAT registered, if you are in your first year you will be entitled to a reduction on your rate of 1%, this will be calculated at point of sales invoice.

The tax rate is wrong, how do I change it?

If the FRV rate for your sector is incorrect you will need to update it in the FRV rates listing. Go to Setup > Localization > FRV rates and click the edit pencil icon next to the relevant sector to enter the rate you need to use.

Calculating FRV

This is how Brightpearl handles tax accounting using the Flat rate Scheme:

Purchase Invoices/Orders

You do not pay tax on purchases when using the flat rate scheme. When you raise a Quick Invoice in Brightpearl, purchase tax will be calculated as normal but assigned to the expense (or purchase) account instead of the Purchase Tax Control account. This ensures that the tax on purchases does not appear on your VAT return.

FRV is not currently supported for receiving Purchase Invoices against Purchase Orders. Please raise a quick supplier invoice instead.

Sales Invoices

Sales invoices will be raised with net and tax figures showing for your customers in the usual way; it's only when the sale is invoiced that FRV adjustments are made to post the correct values into your accounts.

The Tax inclusive sale total is used to work out the tax payable, using your FRV rate (eg 6.5%). So if your sale is £100 + 20% VAT, then the taxable turnover is £120.

The FRV tax is 6.5% of £120, ie £7.80.

£7.80 is posted to your Sales tax control account, to appear on your VAT return, and an adjustment of £12.20 is posted to the FRV adjustment account to balance the entry, and also allow you to see the benefit of being on the FRV scheme. In this example the FRV adjustment account has been set to 4000.

The Sales invoice:

And the ledger entries created:

Quick Sales Invoices

FRV is not currently supported for quick sales invoices entered using Accounting > Customers > Enter quick invoice (these menu items will not be available if FRV is turned on).

Note that the tax component (on the 2200 code) of any sale made using the FRV scheme will be at the company's default tax rate (in the example above this is T20, 20%).

Non-Taxable Income

Sometimes you'll want to enter income that's not to be included in your Flat rate turnover calculation, such as bank interest, and anything else that is not classed as "business supplies".

1. Go to Accounting > Enter receipts.
2. Choose a bank account and a suitable account code.
3. Choose "Not taxable" from the tax drop down menu.
4. Enter the total amount.
5. Click Enter receipt.

Taxable Income

ALL taxable income should be entered as a Sales Invoice, and the payment allocated against it. Other income (such as bank interest, loans) do not constitute your "taxable turnover", and can be entered using a Bank receipt as above. You can also use the Enter Journal screen if you like.

If you are VAT registered you can claim back any VAT paid on purchases (input tax), and must pay a proportion of your sales as VAT (output tax). Brightpearl will track the tax on your sales and purchases to provide a VAT return every quarter which is the sum of your output tax less the sum of your input tax.

Tax payable = Output tax - Input tax

Every sale and purchase made affects your Asset accounts, but also affects other accounts.

For example, selling 1 hour of labour at £10 cash including VAT (a standard VAT sale) will generate the following accounting journal entry in Brightpearl. Note how the debit in the asset account (the bank account) is an increase.

Buying some stationery for £5.00 cash (a standard T1 purchase) will generate the following journal entry;

When you generate a VAT Return, Brightpearl will add up all the output tax for the period and subtract the input tax from it, giving the total tax due.

Note how the debits always equal the credits in any journal, and how transfers in or out of asset accounts (such as bank accounts) are always T9 (not involving VAT).