Instead of accounting for the VAT that you pay on purchases and collect on sales, the 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.
How is the VAT Flat Rate Scheme different?
VAT is normally worked out by looking at all of the VAT that your business:
Pays on purchases in a time period
And all of the VAT that it charges on sales in the same time period
Your VAT bill (or VAT rebate) is the difference between those two amounts. So, if the amount of VAT that you paid 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.
The VAT Flat Rate Scheme aims to make the process of accounting and reporting for VAT simpler. Instead of the normal process, businesses registered for VAT FRS pay a flat rate percentage of their annual turnover.
How much VAT will I pay on the Flat Rate Scheme?
With VAT FRS you’ll pay VAT at a flat rate percentage of your total turnover. The actual percentage flat rate that you pay depends on whether you’re a limited cost trader, or if not, then on the sort of business you run.
HMRC consider you to be a limited cost trader if the amount that 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, an architect business pays 14.5%.
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.
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.
Can anyone use the VAT FRS?
You can only apply for VAT 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.
Joining 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.
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About The Author
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.