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Instead of working out the difference between the VAT you pay on purchases and collect on sales (like you do with standard VAT), the VAT Flat Rate Scheme (FRS) works out your VAT bill as a percentage of your annual turnover. There are other types of VAT accounting schemes available to choose from, so it’s useful to do your research before making any decisions about which type to use.

In this article we go into more detail about how the VAT Flat Rate Scheme (FRS) works.

How is the VAT Flat Rate Scheme (FRS) different to standard VAT?

With standard VAT the amount of VAT that your business owes or can reclaim is worked out by calculating the difference between the total amount of VAT your business:

  • Pays on purchases in a VAT period
  • Charges on sales in the same period

If the total amount of VAT that you paid out is higher, you can claim back the difference from HMRC. If the amount that you charged to your customers is higher, you must pay the difference to HMRC.

It can be a bit confusing, so the VAT Flat Rate Scheme (FRS) aims to make the process of accounting and reporting for VAT simpler. Instead of the normal process, businesses registered for the VAT Flat Rate Scheme (FRS) pay their VAT bill as a flat rate percentage of their annual turnover.
 

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How much will I pay on the VAT Flat Rate Scheme?

The flat rate you pay as a percentage of your total turnover depends on whether you’re a ‘limited cost trader’ and if you’re not, then it depends on the sort of business you run.

HMRC consider you a limited cost trader if the amount you spend on goods is less than 2% of your turnover, or less than £1,000 per year.

 
If you’re not a limited cost trader, then you’ll pay VAT depending on what type of business it is. For instance, architects who register for the VAT Flat Rate Scheme pay their VAT bill as a flat rate of 14.5% of their total turnover.

Paying HMRC a flat rate like this means that your business keeps the difference if you collect more VAT from customers than you pay on purchases. So, if your business charges the standard 20% rate of VAT on the sales it makes, but the flat rate for your industry is much lower, this could be quite tax efficient because you’ll receive a bigger margin!

Can I reclaim VAT if I use the Flat Rate Scheme?

Using the Flat Rate Scheme means that you won’t be able to reclaim any of the VAT that you pay on purchases. If you pay more than you charge to customers you can’t claim back the difference, or even offset the VAT you pay against what you collect. There are some exceptions for capital assets worth more than £2,000 though.

Am I eligible for the VAT Flat Rate Scheme?

You can only apply for VAT Flat Rate Scheme (FRS) if you expect your taxable turnover for the next twelve months to be below £150,000. This is excluding any VAT you charge, any capital asset sales, and any VAT exempt sales.

Normally you can stay in the scheme until your turnover reaches £230,000, though you should leave earlier if you expect to reach that threshold within the next 30 days.

How do I join the VAT Flat Rate Scheme

Applicants can either join the scheme online whilst registering for VAT, or complete a VAT600 FRS online, and then send it to HMRC by email or post. There’s a 1% discount on the flat rate of VAT that you would normally pay if you use the scheme during your first year of being VAT registered.

 
Learn more about our online accounting services for businesses. Call 020 3355 4047 to chat to the team, and get an instant online quote.

About The Author

Beth-Anne Karellen

I'm an experienced and fully AAT and ACCA qualified accountant, who is enthusiastic about helping business owners succeed. I also love cooking and needlepoint (at different times!). Learn more about Beth.

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