A Guide to Flat Rate VAT
What is the Flat Rate VAT Scheme?
The Flat Rate VAT Scheme is an alternative way for limited companies to work out how much VAT to pay HM Revenue and Customs – a perk you can enjoy as a contractor working outside IR35.
The scheme is an incentive provided by the government to help simplify taxes. Using the standard VAT accounting method means that every quarter you will be required to fill in a VAT return form. However, since some contractors are eligible to join the Flat Rate VAT Scheme, you charge a standard rate of 20% on your invoices but pay HMRC a lower rate.
This amount can vary depending on your profession. The flat rates are set by HMRC and vary depending on the industry sector, from 4% to 14.5%. You can view our full category list below.
Changes to the Flat Rate VAT Scheme
Prior to April 2017, contractors could benefit from rates as low as 11%. However, due to what HMRC regarded as ‘widespread abuse’ of the flat rate scheme, from April 2017 changes affecting businesses with a very low-cost basis have been implemented.
A new entity was declared, known as the limited cost trader. If a contractor is defined under this status, the VAT bill would instead be 16.5%. Most contractors fell into this new category of limited cost trader and for this reason, the flat rate VAT scheme may be less valuable to anyone who previously paid a VAT rate lower than 16.5%.
A business that is deemed as a “limited cost trader”, should apply a new rate of 16.5% to their VAT inclusive turnover to calculate their VAT liability, instead of applying the fixed percentage based on their trade or profession. For example, for a typical IT contractor, currently on a fixed flat rate of 14.5%, this means an increase of 2%. Note that, if you are in the first year of the Flat Rate Scheme a further 1% discount still applies.
You can use this government tool, to see if you meet the limited cost trader criteria.
If you are not currently VAT registered but need to be, then you have to look at any business purchases you make, and see what VAT you could claim back and whether this would make you better off than the Flat Rate Scheme. If you are already VAT registered but now fall below the current threshold of £85,000, you may want to think about deregistering altogether.
Your dedicated accountant will be able to advise which route will be the most beneficial to you.
What is a limited cost trader?
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
Important notes about the Flat Rate Scheme
If you estimate that your annual turnover excluding VAT will exceed £150,000 in your first year, you shouldn’t join the scheme.
If your annual turnover exceeds £230,000 of VAT inclusive revenue in subsequent years, you must stop using the scheme.
Companies on the Flat Rate Scheme are unable to claim back any VAT on purchased goods and expenses for their business. However, you can reclaim VAT on capital asset purchases over £2,000, for example, a PC.
Providing all the capital purchases are on the same receipt such as a PC, printer, and scanner, you can claim the VAT back on these items. You cannot, however, buy a PC one month for £1,500 then a printer the next month for £300 and a scanner the month after for £200 and add them together – they must all be on the same receipt.
Like standard VAT, the scheme still requires you to complete a quarterly VAT return form (online only). You will need to charge the standard VAT rate, currently 20% of your invoices, rather than accounting for the VAT on every payment, when you do your quarterly report, you will only pay a single flat rate percentage on your turnover of each quarter.
As the VAT percentage you pay is considerably lower than that of the standard VAT rate (see below table for a full list of the flat rates depending on your profession) you can keep the difference as your profit.
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% |
| 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 | 105% |
| 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 | 6.5% |
| T | |
| Transport or storage, including couriers, freight, removals, and taxis | 10% |
| Travel agency | 6.5% |
| V | |
| Veterinary medicine | 11% |
| W | |
| Wholesaling agricultural products | 8% |
| Wholesaling food | 7.5% |
| Wholesaling that is not listed elsewhere | 8.5% |
Fixed rate VAT advantages
The ability to earn money from VAT: you can earn extra each year simply out of VAT (the government does this as Flat Rate VAT is simple for them to manage and you are, in effect, acting as a tax collector).
A reduced amount of paperwork to handle as you are not submitting any of your input costs to HMRC, all you need to do is keep the receipts from your purchases.
If you are a new business using the Flat Rate Scheme in your first year, you receive a further 1% decrease in the overall percentage of tax you pay each quarter.
FAQs
What is the Flat Rate VAT Scheme?
The Flat Rate VAT Scheme (FRS) is a government scheme to simplify taxes. You can reclaim a fixed percentage of VAT on capital expenditure, according to your industry. 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 company must be VAT registered, with a VAT taxable turnover of less than £150,000 per annum. You can continue to use the scheme until your VAT 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 using the scheme.
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.
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