Do you understand the VAT Flat Rate Scheme?

9th December 2013

Do you understand the VAT Flat Rate Scheme?


To me VAT seems to be the area which most small businesses struggle to get their heads around.  Questions arise on what items of expenditure VAT can be claimed upon and more often than not retrospective adjustments arise when the year end accounts are prepared because of this.

Although the VAT Flat Rate Scheme (FRS) has been around for a few years there doesn’t appear to be a great amount of public awareness of the benefits of this scheme which not only simplifies the calculation of VAT, but can also for many clients increase profits at the same time.

The scheme works by basing VAT liabilities on turnover and in doing so, cuts out the work necessary to calculate the input VAT on all the costs a business incurs.

To compensate for the lack of input VAT to offset against the output VAT, a business only pays a certain percentage of the total turnover over to HMRC as VAT.

Each FRS registered business is designated a percentage based on the business activity.   A business activity likely to have low level of vatable costs, such as an IT consultant, would get a high rate (14.5%).   While a business activity likely to have more vatable costs such as a pub (6.5%) would get a lower rate to pay over.

This percentage is applied to the gross value of income so the amount after the 20% VAT has been added.  For example if an IT consultant invoiced £10,000+£2,000 VAT for the quarter then the 14.5% would apply to the £12,000 gross invoiced, ie £1,740 to pay over.

If the actual VAT inputs for this business were less than £260 for this quarter in effect an additional profit has been made.   This is quite common in businesses with low levels of expenses.

The FRS scheme is only available to join for businesses with turnover expected in the next year of less than £150,000 (excluding VAT) and is certainly not suitable for every business.  Do not contemplate joining if you are likely to receive VAT repayments.  It is not likely to be the right scheme if you have high standard-rated costs as you may be losing out overall.  Likewise if you have sizeable zero-rated or exempt sales.

However if you are a business which invoices other VAT registered businesses and have very low expenditure, joining the FRS can be extremely beneficial.

For more information, please contact Alex Koupland - Manager

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