The VAT Flat Rate Scheme Explained
Posted on 28th April 2016
The VAT Flat Rate Scheme (FRS) allows small businesses with a turnover up to £150,000 to calculate the amount of VAT they pay back to HMRC as a fixed percentage between 5% and 14.5%, instead of the standard 20%. The amount payable is calculated based on the type of business you have.
**Critical changes were introduced to the flat rate scheme from 1 April 2017. Please read our more recent blog for key changes.**
Is the Flat Rate Scheme right for your business?
Dependant on the fixed percentage allocated to your business, the scheme could save you money and allow to you more effectively monitor revenue and outgoings.
Under the scheme, so long as your turnover doesn’t exceed £150,000, you would continue to charge 20% on sales and services, but only pay back a portion of that to HMRC. For example, if you are a photographer under the scheme, you would charge 20% VAT for services, but would only have to pay back 11%, and would be able to keep the remaining 9% as profit.
The fixed percentage ranges from 4% (retail) to 14.5% (labour only construction, legal services, and others). Take a look at the table on the HMRC website to find out how much your business would pay on VAT under the scheme.
Remember, you’ll receive a 1% discount on the amount listed on the table in your first year on the scheme. For example, a computer repair company would pay 9.5% in the first year on the scheme, and 10.5% every year thereafter.
Although it may sound like a no-brainer, companies on the scheme are only able to reclaim VAT on capital asset purchases over £2,000. Items under the capital goods scheme are excluded, but you will lose out on claiming back the VAT on all other purchased goods and services; worth bearing in mind if your company buys large amounts of stock.
Am I eligible?
You may be eligible for FRS if you have a VAT-registered business and you believe your VAT exclusive taxable revenue to be £150,000 or less in the next 12 months.
You will not be eligible if for whatever reason:
You joined a VAT group, or a margin or capital goods VAT scheme, in the past 24 months
You registered for VAT as a business division in the past 24 months
Your company has membership of a Cash Accounting Scheme (take a look at the cash-based method for calculating turnover under the FRS)
You committed a VAT related offence in the past 12 months
You can leave the FRS at any time. If you leave and then decide to join again, you will have to wait a minimum of 12 months from your leaving date to re-join.
How do I apply?
You can apply for the VAT Flat Rate Scheme at the beginning of any tax period.
Apply online when you register for VAT
Apply by post by filling out the VAT600FRS form (to join the Flat Rate Scheme only); or the VAT600AA/FRS form (to join both the Flat Rate Scheme and the Annual Accounting Scheme)
Please get in touch for more information and to discuss your circumstances.
Written by:
Nicola J O'Sullivan -
Effective Accounting
Founder | Xero Champion | IR35 Expert
Tagged as: VAT
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