A Comprehensive Guide for the VAT Flat Rate Scheme
Updated: Nov 1
The VAT Flat Rate Scheme is a simplified method for managing VAT in the UK. It is designed for small businesses, where the VAT turnover must be £150,000 or less (excluding VAT). The scheme allows businesses to pay a fixed rate of VAT to HM Revenue and Customs (HMRC), rather than calculating the difference between the VAT charged by the business to customers and the VAT the business pays on their own purchases.
Key Features of the Scheme
Under the Flat Rate Scheme, businesses pay a fixed rate of VAT to HMRC. The rate is determined by the type of business. The key advantage of this scheme is that businesses get to keep the difference between what they charge their customers in VAT and what they pay to HMRC. However, businesses cannot reclaim the VAT on their purchases, except for certain capital assets over £2,000.
Eligibility Criteria for the VAT Flat Rate Scheme
To be eligible for the VAT Flat Rate Scheme, you must be a VAT-registered business and expect your VAT taxable turnover to be £150,000 or less (excluding VAT) in the next 12 months. VAT taxable turnover refers to the total of everything sold that is not VAT exempt.
The VAT Flat Rate Scheme (FRS) is a simplified accounting scheme for small businesses. The scheme is designed to reduce the amount of VAT management for businesses, but it's not suitable for every business. Here's an overview of the eligibility criteria and some considerations surrounding the VAT Flat Rate Scheme in the UK:
VAT Registration: To be eligible for the VAT Flat Rate Scheme, the foremost requirement is that you must be a VAT-registered business.
VAT Taxable Turnover: Your VAT taxable turnover, which is the total of everything sold that is not VAT exempt, is expected to be £150,000 or less (excluding VAT) in the next 12 months.
Industry Specific Rates: HMRC has a list of flat rate percentages based on different industries and businesses. It's crucial to select the rate that best fits your business.
First Year Discount: If you’re in your first year of VAT registration, you get a 1% discount on your flat rate.
Recent Exit from FRS: If you left the Flat Rate Scheme in the last 12 months, you cannot re-join the scheme.
VAT Offence: Committing a VAT offence, like VAT evasion, in the last 12 months disqualifies you from using the scheme.
VAT Group or Business Division Registration: If you joined (or were eligible to join) a VAT group, or registered for VAT as a business division in the last 24 months, you're ineligible for the scheme.
Association with another Business: If your business is closely associated with another business, the scheme is not accessible.
Margin or Capital Goods VAT Scheme Membership: If you’ve joined a margin or capital goods VAT scheme, you are disqualified from the Flat Rate Scheme.
Cash Accounting Scheme Membership: You cannot use the scheme with the Cash Accounting Scheme. Instead, the Flat Rate Scheme has its own cash-based method for calculating turnover.
VAT Reclaim on Purchases: Under the Flat Rate Scheme, you can't claim back any of the VAT you made on purchases, unless you buy a capital asset that cost £2,000 or more including VAT.
Exiting the Scheme: You must leave the scheme if you’re no longer eligible to be in it, or on the anniversary of joining, your turnover in the last 12 months was more than £230,000 (including VAT) or you expect it to be in the next 12 months. Additionally, if you expect your total income in the next 30 days alone to be more than £230,000 (including VAT), you must exit the scheme.
The VAT Flat Rate Scheme could be a useful tool for simplifying your VAT accounting, provided your business meets the eligibility criteria and none of the exceptions apply to your situation. Ensure to understand all the intricacies surrounding the VAT Flat Rate Scheme before deciding to apply, as it might have a significant impact on your VAT liabilities and overall business operations.
Joining the Scheme
To join the VAT Flat Rate Scheme, businesses must apply to HMRC. The scheme is most beneficial for businesses that have a VAT turnover of £150,000 or less (excluding VAT). It is recommended to talk to an accountant or tax adviser for advice on whether the Flat Rate Scheme is right for your business.
To join the VAT Flat Rate Scheme, you must first ensure that you are eligible. Once confirmed, you can join the scheme online during your VAT registration process. Alternatively, you can fill in the VAT600 FRS form and either email it to firstname.lastname@example.org or send it by post to BT VAT, HM Revenue and Customs, BX9 1WR. If you wish to apply for the Annual Accounting Scheme simultaneously, use the VAT600 AA/FRS form. After submission, you will receive a confirmation of your successful joining through your VAT online account or via post if you did not apply online.
Leaving the Scheme
Businesses can also choose to leave the scheme. The process for leaving the scheme is not detailed in the provided content, but it would typically involve notifying HMRC and switching to the standard VAT accounting method.
You have the option to leave the scheme at any time. However, you must leave if you are no longer eligible to be in it. To leave, you need to write to HMRC at the same address mentioned above. They will then confirm your leaving date. Please note that you must wait 12 months before you can rejoin the scheme.
You must leave the scheme if you're no longer eligible to be in it, or if on the anniversary of joining, your turnover in the last 12 months was more than £230,000 (including VAT), or you expect it to be in the next 12 months. You also must leave if you expect your total income in the next 30 days alone to be more than £230,000 (including VAT).
Working Out Your Flat Rate for the VAT Flat Rate Scheme
The VAT flat rate you use usually depends on your business type. However, if your business spends a small amount on goods, you're classified as a 'limited cost business' and must pay a higher rate of 16.5%. A small amount of goods is defined as costs less than either 2% of your turnover or £1,000 a year (if your costs are more than 2%).
Flat Rates for Different Types of Businesses
The flat rate varies according to the type of business. For example, accountancy or book-keeping businesses have a flat rate of 14.5%, advertising businesses have a rate of 11%, and agricultural services also have a rate of 11%. The rates vary across different sectors, with some sectors like pubs having different rates depending on the date due to changes in regulations.
Here is a list of flat rates for different types of industries/businesses under the VAT Flat Rate Scheme in the UK:
Accountancy or book-keeping: 14.5%
Agricultural services: 11%
Any other activity not listed elsewhere: 12%
Architect, civil and structural engineer or surveyor: 14.5%
Boarding or care of animals: 12%
Business services not listed elsewhere: 12%
Catering services including restaurants and takeaways (varies by date):
Before 15 July 2020: 12.5%
From 15 July 2020 to 30 September 2021: 4.5%
From 1 October 2021 to 31 March 2022: 8.5%
From 1 April 2022: 12.5%
Computer and IT consultancy or data processing: 14.5%
Computer repair services: 10.5%
Entertainment or journalism: 12.5%
Estate agency or property management services: 12%
Farming or agriculture not listed elsewhere: 6.5%
Film, radio, television or video production: 13%
Financial services: 13.5%
Forestry or fishing: 10.5%
General building or construction services: 9.5%
Hairdressing or other beauty treatment services: 13%
Hiring or renting goods: 9.5%
Hotel or accommodation (varies by date):
Before 15 July 2020: 10.5%
From 15 July 2020 to 30 September 2021: 0%
From 1 October 2021 to 31 March 2022: 5.5%
From 1 April 2022: 10.5%
Investigation or security: 12%
Labour-only building or construction services: 14.5%
Laundry or dry-cleaning services: 12%
Lawyer or legal services: 14.5%
Library, archive, museum or other cultural activity: 9.5%
Management consultancy: 14%
Manufacturing fabricated metal products: 10.5%
Manufacturing food: 9%
Manufacturing not listed elsewhere: 9.5%
Manufacturing yarn, textiles or clothing: 9%
Membership organisation: 8%
Mining or quarrying: 10%
Post offices: 5%
Pubs (varies by date):
Before 15 July 2020: 6.5%
From 15 July 2020 to 30 September 2021: 1%
From 1 October 2021 to 31 March 2022: 4%
From 1 April 2022: 6.5%
Real estate activity not listed elsewhere: 14%
Repairing personal or household goods: 10%
Repairing vehicles: 8.5%
Retailing food, confectionery, tobacco, newspapers or children’s clothing: 4%
Retailing pharmaceuticals, medical goods, cosmetics or toiletries: 8%
Retailing not listed elsewhere: 7.5%
Retailing vehicles or fuel: 6.5%
Secretarial services: 13%
Social work: 11%
Sport or recreation: 8.5%
Transport or storage, including couriers, freight, removals and taxis: 10%
Travel agency: 10.5%
Veterinary medicine: 11%
Wholesaling agricultural products: 8%
Wholesaling food: 7.5%
Wholesaling not listed elsewhere: 8.5%
Please note that 'Labour-only building or construction services' means building services where the value of the materials supplied is less than 10% of the turnover for those services. If more than this amount, the business is classed as 'General building or construction services'.
The VAT Flat Rate Scheme's rate structure is industry-specific, meaning different types of businesses have to apply different flat rates of VAT. This is a crucial aspect since it directly impacts the amount of VAT a business has to pay.
Understanding the Industry-Specific Rates:
The VAT Flat Rate Scheme has set percentages for different types of businesses ranging from 4% to 16.5% based on the industry they operate in. For instance, accountancy or book-keeping services have a rate of 14.5%, advertising businesses have a rate of 11%, while catering services have had varying rates due to adjustments made in response to the COVID-19 pandemic.
Selecting the Correct Rate:
If a business falls into more than one category due to making different types of sales, the business owner has to choose the percentage that applies to the majority of the sales and apply that to the total sales. This can be a common area of concern as selecting the incorrect rate can lead to incorrect VAT payments.
Calculating the Flat Rate:
Business owners need to understand how to calculate the VAT using the flat rate, and this is achieved through different turnover methods like the basic turnover method, the cash-based turnover method, and the retailer’s turnover method. This could be a common technical question as it's crucial for accurate VAT payments.
Changes in Flat Rate Percentages:
Especially in recent times, there have been changes in flat rate percentages, such as the adjustments made for catering, accommodation, and pub sectors in response to the COVID-19 pandemic. Keeping up with these changes and understanding how they impact VAT payments is a frequent technical inquiry.
Determining VAT Taxable Turnover:
Another common technical question is regarding the determination of VAT taxable turnover, which is essential for eligibility in the VAT Flat Rate Scheme and is also a factor in determining the VAT amount payable under the scheme.
These technical aspects are crucial for businesses to understand and apply correctly to ensure compliance with the VAT Flat Rate Scheme rules and accurate VAT payments.
Calculator to Calculate VAT Rates for Different Types of Businesses Under VAT Flat Rate Scheme
Calculating Your VAT Payment
The tax you pay is calculated by multiplying your VAT flat rate by your 'VAT inclusive turnover'. For example, if you bill a customer for £1,000, adding VAT at 20% to make £1,200 in total, and you're a photographer (with a VAT flat rate of 11%), your flat rate payment will be 11% of £1,200, or £132. VAT-inclusive turnover includes business income (such as from sales) and the VAT paid on that income.
Adjusting for Changes in Flat Rates
If there's a change in the flat rate during your accounting period, you should calculate two flat rates. The first calculation should start from day one of your accounting period to the last day of the old flat rate. The second should start from the date of the new flat rate to the end of your accounting period.
The Merits and the Demerits of the VAT Flat Rate Scheme UK
The Value Added Tax (VAT) Flat Rate Scheme in the UK is a simplified accounting method designed to ease VAT management for small businesses. Rather than calculating the VAT on each transaction, businesses can pay a fixed percentage of their turnover as VAT. This discussion will explore the main advantages and disadvantages of the VAT Flat Rate Scheme.
Advantages of the VAT Flat Rate Scheme
The Flat Rate Scheme significantly simplifies VAT accounting. By calculating VAT on overall turnover rather than individual transactions, businesses can save valuable time and resources, which they can direct towards core operational activities.
Predictability and Planning
With a fixed rate applicable to the turnover, businesses can anticipate VAT payments with greater certainty, improving financial planning and cash flow management.
Reduced Administrative Burden
The VAT Flat Rate Scheme reduces the administrative burden associated with managing and processing a large number of receipts and invoices. This can lead to substantial cost savings for small businesses.
Lower VAT Payments
For some businesses, especially those with low expenditure on VAT-eligible goods and services, the scheme could result in lower VAT payments compared to the standard VAT scheme.
Disadvantages of the VAT Flat Rate Scheme
Ineligibility for VAT Reclaim
Under the scheme, businesses generally cannot reclaim VAT on purchases, with a few exceptions for capital assets over £2,000. This could result in higher costs for businesses with substantial VAT-eligible expenses.
Fluctuations in VAT Rates
The flat rate percentages vary depending on the business sector, and changes in these rates can impact the amount of VAT payable, creating potential financial uncertainty.
Constraints on Eligibility
The scheme is only available to businesses with a VAT-exclusive turnover of £150,000 or less per year. This restricts its applicability to smaller businesses.
If a business incurs lower VAT charges on purchases than the flat rate, they could end up paying more VAT than under the standard scheme. This could be particularly disadvantageous for businesses with high volumes of zero-rated or exempt sales.
The VAT Flat Rate Scheme has clear merits such as simplified accounting and reduced administrative burden, making it an attractive option for many small businesses.
However, it also carries potential drawbacks, such as ineligibility for VAT reclaim and potential overpayment. Therefore, businesses must consider their specific circumstances, including the nature of their expenses, turnover, and sector-specific flat rate, before opting for this scheme. It is recommended to seek professional advice from a tax accountant to make an informed decision about the best VAT scheme for the business.
How Can a Tax Accountant Help You With the VAT Flat Rate Scheme?
Navigating the complexities of the Value Added Tax (VAT) Flat Rate Scheme in the UK can be a challenging task for small businesses. Professional guidance from a tax accountant can play an instrumental role in maximising the benefits of this scheme. This article elucidates how a tax accountant can assist your business in implementing and optimising the VAT Flat Rate Scheme.
Understanding the VAT Flat Rate Scheme
The VAT Flat Rate Scheme, while simpler than the standard VAT, can still be complex. A tax accountant can help you understand the nuances of the scheme, such as the applicable flat rates, the implications of the limited-cost trader rule, and the conditions of the scheme.
A tax accountant can assess your business's eligibility for the scheme based on the specified turnover limit and other relevant criteria, and advise whether the scheme would be beneficial for your business.
Implementing the VAT Flat Rate Scheme
Setting Up the Scheme
Setting up the Flat Rate Scheme requires specific procedural steps. A tax accountant can efficiently manage the entire process, from filling out the application form accurately to submitting it within the required timeline.
Determining the Correct Flat Rate
Different business sectors have different flat rates. A tax accountant can accurately identify the appropriate rate for your business, ensuring you pay the correct amount of VAT.
Maximising the Benefits of the VAT Flat Rate Scheme
Streamlining Accounting Processes
A tax accountant can implement a seamless and effective accounting system for managing your VAT under the scheme, thereby ensuring your business fully reaps the benefits of simplified VAT accounting.
Ensuring VAT Compliance
With their expertise in tax regulations, an accountant can ensure your business remains compliant with all VAT-related requirements under the scheme, minimising the risk of penalties due to errors or non-compliance.
Claiming VAT on Capital Assets
While the scheme generally doesn't allow for reclaiming VAT on purchases, exceptions are made for capital assets over £2,000. An accountant can guide you through the process of identifying eligible assets and claiming back VAT on them.
Mitigating the Potential Drawbacks
Advising on Changes to Flat Rates
Flat rates can change, depending on updates to regulations or changes in your business sector. A tax accountant can keep track of these changes, advising you on the impacts and any necessary adjustments to your VAT payments.
Assessing Impact on Business Costs
For businesses with substantial VAT-eligible expenses, the scheme could increase costs, as you generally cannot reclaim VAT. A tax accountant can help assess these impacts, advising you on whether to continue with the scheme or revert to standard VAT accounting.
In the labyrinth of VAT schemes, a tax accountant can provide crucial guidance, helping your business navigate smoothly through the VAT Flat Rate Scheme. Their expert advice can ensure you make the most of the scheme's benefits and minimise potential drawbacks. By entrusting your VAT management to a tax accountant, you can focus more on your business growth while remaining confident in your compliance with VAT regulations.
The VAT Flat Rate Scheme is a useful tool for small businesses in the UK, simplifying the process of managing VAT. However, it's important to understand the details of the scheme and consider whether it's the right fit for your business. Consulting with an accountant or tax adviser is recommended before making a decision.