What is the VAT Flat Rate Scheme?

VAT is one of the most complex and least understood taxes in the UK, despite being one of the most widely paid. To reduce the administrative burden on certain businesses, the VAT Flat Rate Scheme (FRS) presents a simplified system of calculating and paying VAT. This blog will outline how it works and what it means for your business.

How does the VAT Flat Rate Scheme work?

The VAT Flat Rate Scheme allows certain businesses to pay a flat-rate percentage of VAT-inclusive turnover. This is significantly simpler and requires fewer calculations than tracking input VAT (the VAT your business pays on business purchases) and output VAT (the VAT charged to your customers).

Put simply, the VAT Flat Rate Scheme means:

• Your business pays a fixed rate of VAT to HMRC
• You keep the difference between what you charge your customers and pay to HMRC
• However, you will not be able to reclaim VAT on your purchases (with some exceptions)

Which businesses qualify?

Not all businesses are eligible for the VAT Flat Rate Scheme. However, if your business meets the following criteria, you should speak to your accountant or tax adviser about it because you may qualify.

• Your annual taxable turnover (excluding VAT) is expected to be £150,000 or below in the next 12 months.
• Your business is VAT registered.
• You have not committed any VAT offences in the last 12 months.
• You have not joined (or been eligible to join) a VAT group in the last 2 years.
• Your business is not closely associated with another business.
• You have not joined the capital goods or VAT margin schemes.
• You have not left the scheme in the last 12 months.

What flat rate of VAT do you pay?

The flat rate of VAT paid by eligible businesses depends on the type of business. Below are some examples. For a full list, we recommend reviewing the gov.uk documentation.

Limited Cost Business

You’re classed as a ‘limited cost business’ if your goods cost less than either:

• 2% of your turnover
• £1,000 a year (if your costs are more than 2%)

A higher rate of 16.5% is paid by limited-cost businesses.

The first-year reduction

If your business is in its first year of being VAT registered, it will also be eligible for a 1% VAT flat rate percentage reduction. This means you can deduct 1% from the flat rate applied to your turnover until you have been VAT-registered for one year.

How to join the scheme (if eligible)

If your business meets the criteria set out in this article, it is likely that you are eligible for the VAT Flat Rate Scheme. You can apply to HMRC yourself online or by post; however, we strongly recommend speaking to a VAT specialist to ensure you aren’t caught by one of the many potential complexities that VAT can present.

Our dedicated VAT team is happy to help you with this or any other issue relating to VAT for business. If you want to get started, please contact us using the form below.