VAT Flat Rate Scheme Explained

The VAT Flat Rate Scheme is a simplified way for small businesses to calculate and pay VAT. Instead of working out the difference between VAT on sales and purchases, you apply a fixed percentage to your turnover and keep the difference between what you charge customers and what you pay HMRC....

What is the Flat Rate Scheme?

The Flat Rate Scheme allows you to calculate your VAT bill using a fixed percentage rate based on your business type. You apply this rate to your gross turnover (including VAT) to work out what you owe HMRC.

Under normal VAT accounting, you charge VAT to customers, reclaim VAT on purchases, and pay HMRC the difference. With the Flat Rate Scheme, you still charge VAT to customers at the standard rate (currently 20%), but you pay HMRC a lower fixed percentage and cannot reclaim VAT on most purchases.

The flat rates include an allowance for the VAT you would have reclaimed on purchases, which is why they are lower than the standard 20% rate.

Benefits of the scheme

The main advantages are:

Simpler record keeping – you don't need detailed records of VAT on every purchase
Fixed percentages – these are lower than the standard 20% rate, so you may keep some of the VAT you charge
Better cash flow management – you know in advance how much VAT you'll owe

Who can join

You can join the Flat Rate Scheme if:

You're registered for VAT (or registering for the first time)
Your VAT taxable turnover is expected to be £150,000 or less (excluding VAT) in the next 12 months

VAT taxable turnover means the total value of everything you sell that isn't VAT exempt. This includes standard-rated, zero-rated and reduced-rated supplies.

Who cannot join

You cannot use the scheme if:

You left the scheme in the last 12 months
You committed a VAT offence in the last 12 months (such as VAT evasion)
You joined or were eligible to join a VAT group in the last 24 months
You registered for VAT as a business division in the last 24 months
Your business is closely associated with another business
You use certain other VAT schemes, including the margin scheme for second-hand goods, the auctioneers' scheme, the tour operators' margin scheme, or the capital goods scheme for certain items
You're required to use the VAT domestic reverse charge (for sectors including building and construction services, mobile phones, computer chips, emissions allowances, and wholesale gas, electricity and electronic communications)

You cannot use the Flat Rate Scheme alongside the Cash Accounting Scheme, though the Flat Rate Scheme has its own cash-based turnover method you can use instead.

When the scheme may not suit you

The scheme is designed for businesses with low input VAT. It won't benefit you if:

You regularly reclaim more VAT than you charge (you would lose the right to reclaim input tax)
Most of your customers are VAT-registered (you must still issue full VAT invoices showing 20% VAT, but you keep less because you pay HMRC at the flat rate)
You buy or sell goods internationally, which can complicate the scheme

Because flat rates are averages, you may end up paying more VAT under this scheme than under normal accounting.

How much you pay

Your flat rate depends on your business type. Rates range from 4% for retailers of food and newspapers to 14.5% for accountants, architects and IT consultants.

First year discount

If you're in your first year as a VAT-registered business, you get a 1% discount on your flat rate.

Limited cost businesses

You're classified as a "limited cost business" if your goods (not services) cost less than either:

2% of your turnover, or
£1,000 per year (if your costs are more than 2%)

Limited cost businesses pay a higher rate of 16.5%, regardless of business type. HMRC provides a tool to help you check if this applies to you.

Example flat rates by business type

Here are some common flat rates:

Accountancy or book-keeping: 14.5%
Management consultancy: 14%
Computer and IT consultancy: 14.5%
Architect or surveyor: 14.5%
Advertising: 11%
Catering services: 12.5%
General building or construction: 9.5%
Labour-only construction: 14.5%
Retailing food, newspapers: 4%
Farming or agriculture: 6.5%
Lawyer or legal services: 14.5%
Hairdressing or beauty: 13%
Pubs: 6.5%
Hotel or accommodation: 10.5%

If your business covers more than one sector, use the business type that generates the highest turnover.

Reclaiming VAT on purchases

Under the Flat Rate Scheme, you cannot reclaim VAT on most purchases. The flat rates are calculated to include an allowance for input tax.

The exception is capital assets (equipment or property used in your business) costing over £2,000 including VAT. You can reclaim VAT on these purchases.

Leaving the scheme

You must leave the scheme if your total VAT-inclusive turnover in the last year exceeds £230,000. However, if HMRC is satisfied your turnover in the next 12 months won't exceed £191,500, you may be allowed to remain in the scheme.

How to join

If you're not yet VAT registered

Register for VAT and apply for the Flat Rate Scheme at the same time. You'll be told how to join the scheme when you complete your VAT registration.

If you're already VAT registered

Apply online using your Government Gateway user ID and password, or fill in form VAT600FRS and post or email it to HMRC.

You'll need:

Your business name and VAT registration number
Your business address and phone number
Your main business activity and the appropriate flat rate percentage
Your preferred start date (normally the beginning of the VAT period after HMRC receives your application)

After you apply

HMRC will notify you in writing if your application is successful. If you don't hear back within 30 calendar days, contact HMRC.

The start date will normally be from the beginning of your next VAT period after HMRC receives your application. HMRC won't usually let you backdate the scheme to periods where you've already calculated your VAT liability.

Using the scheme with other VAT schemes

You can use the Flat Rate Scheme with the Annual Accounting Scheme, but you must apply to each scheme separately.

You cannot use it with retail schemes (though the Flat Rate Scheme has its own retail method), the Cash Accounting Scheme (a similar cash-based method exists within the Flat Rate Scheme), or schemes involving margins and reverse charges.

Sources

This article provides general guidance based on current HMRC rules. For advice specific to your situation, speak to your accountant.