What is the Flat Rate VAT Scheme?
The Flat Rate Scheme for VAT is an alternative method of VAT calculation, designed to simplify the process and reduce the administrative burden for small businesses.
Under the default Standard Rate Scheme for VAT, you charge VAT on the supplies you make (output tax,) offset the VAT you have been charged on eligible expenditure (input tax,) and pay the difference to HM Revenue and Customs. Conversely, utilising the Flat Rate Scheme, you do not ordinarily offset your input VAT, however you pay VAT to HMRC at a fixed percentage of your gross, VAT inclusive, turnover.
The Flat Rate percentage used to calculate your VAT liability is determined by your trade classification and, since 2017, the nature of your business. You can view our full category list below.
What is a limited cost trader?
Prior to April 2017, contractors could benefit from rates as low as 11% and an unintended consequence of the difference between the VAT charged and the VAT paid by businesses was that using the Flat Rate Scheme could generate additional turnover of up to several thousands of pounds a year. Due to what HMRC regarded as this ‘widespread abuse’ of the Flat Rate Scheme, from April 2017 changes affecting businesses with a very low-cost basis were implemented in order to remove this financial advantage.
From April 2017, HMRC introduced a new category of ‘Limited Cost Trader’ and any business that falls under this category should apply a rate of 16.5% to their VAT inclusive turnover to calculate their VAT liability rather than applying the fixed percentage based on their trade or profession.
Limited cost traders are defined as one whose gross expenditure on relevant goods is either:
- Less than 2% of their VAT inclusive turnover or
- Greater than 2% of their VAT inclusive turnover but less than £1,000 per year
The figure should not include the cost of the following items:
- Food and drink for the business or its staff
- Capital expenditure
- Vehicles and fuel
You can use this government tool, to see if you meet the limited cost trader criteria.
Regardless of whether you can use your trade classification percentage or must use the limited cost trader percentage, there is a 1% discount on the VAT payable during the first year of VAT registration.
Important notes about the Flat Rate Scheme
Businesses are eligible to join the Flat Rate Scheme provided that their annual taxable turnover, exclusive of VAT does not exceed £150,000. Once a business has been accepted onto the scheme, then it can remain so provided that its VAT inclusive turnover does not exceed £230,000. Businesses can appeal removal from the scheme if they believe that exceeding the threshold was due to exceptional circumstances, however once you have ceased to use the scheme, you cannot reapply for a minimum of twelve months.
As mentioned previously, businesses using the Flat Rate Scheme do not ordinarily offset reclaim input VAT on expenditure, however an important exception to this is capital expenditure on assets, where the VAT inclusive amount exceeds £2,000.
Providing all capital purchases are integral and on the same receipt, for example a PC, monitor and external hard drive, you can claim the VAT back on these items. You cannot, however, buy a PC one month for £1,500 then a monitor the next month for £500 and a hard drive the month after for £200 and add them together in order to reclaim the VAT.
Flat rate percentages
| Category of business | Appropriate percentage |
| A | |
| Accountancy or book-keeping | 14.5% |
| Advertising | 11% |
| Agricultural services | 11% |
| Any other activity not listed elsewhere | 12% |
| Architect, civil and structural engineer or surveyor | 14.5% |
| B | |
| Boarding or care of animals | 12% |
| Business services that are not listed elsewhere | 12% |
| C | |
| Catering services including restaurants and takeaways | 12.5% |
| Computer and IT consultancy or data processing | 14.5% |
| Computer repair services | 10.5% |
| D | |
| Dealing with waste or scrap | 10.5% |
| E | |
| Entertainment or journalism | 12.5% |
| Estate agency or property management services | 12% |
| F | |
| Farming or agriculture that is not listed elsewhere | 6.5% |
| Film, radio, television or video production | 13% |
| Financial services | 13.5% |
| Forestry or fishing | 10.5% |
| G | |
| General building or construction services | 9.5% |
| H | |
| Hairdressing or other beauty treatment services | 13% |
| Hiring or renting goods | 9.5% |
| Hotel or accommodation | 10.5% |
| I | |
| Investigation or security | 12% |
| L | |
| Labour-only building or construction services | 14.5% |
| Laundry or dry-cleaning services | 12% |
| Legal services | 14.5% |
| Library, archive, museum or other cultural activity | 9.5% |
| M | |
| Management consultancy | 14% |
| Manufacturing fabricated metal products | 10.5% |
| Manufacturing food | 9% |
| Manufacturing that is not listed elsewhere | 9.5% |
| Manufacturing yarn, textiles or clothing | 9% |
| Membership organisation | 8% |
| Mining or quarrying | 10% |
| P | |
| Packaging | 9% |
| Photography | 11% |
| Post offices | 5% |
| Printing | 8.5% |
| Publishing | 11% |
| Pubs | 6.5% |
| R | |
| Real estate activity not listed elsewhere | 14% |
| Repairing personal or household goods | 10% |
| Repairing vehicles | 8.5% |
| Retailing food, confectionary, tobacco, newspapers or children’s clothing | 4% |
| Retailing pharmaceuticals, medical goods, cosmetics or toiletries | 8% |
| Retailing that is not listed elsewhere | 7.5% |
| Retailing vehicles or fuel | 6.5% |
| S | |
| Secretarial services | 13% |
| Social work | 11% |
| Sport or recreation | 8.5% |
| T | |
| Transport or storage, including couriers, freight, removals, and taxis | 10% |
| Travel agency | 10.5% |
| V | |
| Veterinary medicine | 11% |
| W | |
| Wholesaling agricultural products | 8% |
| Wholesaling food | 7.5% |
| Wholesaling that is not listed elsewhere | 8.5% |
Flat Rate VAT advantages and disadvantages
Since the introduction of the limited cost trader category, the previous financial advantage of using the scheme has largely been removed, with the exception of the 1% discount in the first year of VAT registration.
The key advantage then, and the reason the scheme was designed, is to reduce the volume of administration and time taken to prepare VAT returns for businesses using the scheme.
Where a business has significant expenditure on which VAT could be reclaimed, the scheme becomes significantly less advantageous from a financial perspective.
Furthermore, both zero rated and VAT exempt turnover are included in the gross turnover to which the flat rate percentage is applied, so although you won’t have charged VAT on any such sales, VAT will be payable on these.
FAQs
What is the Flat Rate VAT Scheme?
The Flat Rate VAT Scheme (FRS) is a government scheme to simplify tax for small businesses. You pay VAT at a fixed percentage of your taxable turnover. Assuming the business meets the criteria of a limited cost trader, you would charge VAT at 20% of the net invoice value, and then pay VAT at 16.5% of the gross invoice total.
Will using the flat rate scheme take up more of my time?
No, in fact the flat rate scheme was created by HMRC to simplify VAT for small businesses. You should save time. There is no need to separate out the VAT on your purchases and reclaim this. You simply calculate your VAT liability as a flat rate percentage of your gross invoice total. You should note that whilst you are unable to reclaim VAT on your expenses, you can reclaim VAT on capital expenditure over £2,000.
How do I qualify for the scheme?
Your business must be VAT registered, with a VAT exclusive taxable turnover of less than £150,000 per annum. You can continue to use the scheme until your VAT inclusive taxable turnover reaches £230,000 per annum.
What benefit does using the scheme offer to me?
You will have a reduced administrative burden (you’re only required to keep receipts as proof of purchase, not calculate output tax against input tax), and you’ll also enjoy a further 1% reduction in your first year of VAT registration.
How do I work out what I should be paying?
To calculate what you owe HMRC, simply multiply your VAT inclusive turnover by your flat rate. For example, if you charge a client £3,600 (including 20% VAT), and you are a limited cost trader within your first year of trade you will have a flat rate of 15.5%. This means you will pay 15.5% of £3,600 = £558 VAT.
Need more information
If you have any questions about the Flat Rate Scheme or indeed VAT in general, please get in touch.