The Flat Rate VAT Scheme is an HMRC initiative to simplify the VAT reporting system to help certain smaller businesses.
It means that you charge VAT to your customers at a fixed rate depending on your industry sector rather than the standard rate of 20%.
What is the VAT Flat Rate Scheme?
The flat rate VAT scheme aims to simplify VAT for small businesses helping to avoid the costs of accounting fees, errors and save business administration time.
Under the rules of the VAT flat rate scheme businesses must:
- Pay a fixed percentage rate of VAT on its sales to HMRC based on the VAT inclusive amount billed to their customers;
- Keep the difference between the VAT charged to customers and actually paid to HMRC;
- Not reclaim the VAT on any of purchases, except for certain capital assets over £2,000.
It is unlike traditional VAT, where a business pays the difference between the amount of VAT they have collected and paid.
How Does Traditional VAT Work
Normally VAT is charged at a standard rate of 20% on most goods and services.
VAT registered businesses are responsible for charging VAT at 20% and paying this over to HMRC, deducting any VAT they have paid to suppliers.
So if a business bills £10,000 plus VAT in a quarter and pays suppliers £5,000 plus VAT, it will make a net payment to HMRC of £1,000.
VAT is a charge on consumers, not businesses. Businesses are just responsible for collecting VAT on behalf of HMRC.
How the VAT Flat Rate Scheme Works
Here’s how the VAT flat rate scheme works, from registering to filling out your first VAT Return:
Do I Qualify for the VAT Flat Rate Scheme?
Businesses with a taxable turnover of less than £150,000 are eligible to join the VAT Flat Rate Scheme.
What is Taxable Turnover?
Taxable turnover means the value of sales that would be relevant for charging the standard rate of VAT (20%), excluding any sales that would be exempt from VAT (such as insurance or some financial services).
You cannot join the VAT flat rate scheme if you:
- left the scheme in the last 12 months;
- committed a VAT offence in the last 12 months, eg VAT evasion;
- joined (or were eligible to join) a VAT group in the last 24 months;
- registered for VAT as a business division in the last 24 months;
- your business is closely associated with another business;
- you’ve joined a margin or capital goods VAT scheme.
Work Out the Flat Rate Percentage applicable to you
HMRC sets out the percentage you should use instead of the standard VAT rate of 20%. These are set according to industries and at a rate that takes account of input VAT that business will generally be paying out.
You can check for the VAT Flat Rate Percentages here but here are some examples:
|Accountancy or book-keeping||14.5%|
|Boarding or care of animals||12%|
|Computer and IT consultancy or data processing||14.5%|
Some VAT flat rate percentages have been reduced in line with the Hospitality and Tourism VAT cut. These include hotels, pubs and catering services. Find out more here.
Check whether you will be classed as a Limited Cost Trader
Since some traders were getting a competitive advantage by making money from the scheme, HMRC introduced new guidelines from 1 April 2017 called Limited Cost Traders.
What is a Limited Cost Trader?
A limited cost trader is a business which:
- spends less than 2% on goods, but not services, of its VAT inclusive turnover during an accounting period or;
- spends less than £1,000 a year will be immediately considered a Limit Cost Trader, even if this is more than 2% of its turnover.
When working out if you spend more than £1,000 a year on purchases remember to EXCLUDE the following from your costs:
- The cost capital purchases (like a new computer)
- Food, drink and entertainment (like lunches for staff)
- Vehicles costs
- Any non physical services such as accounting fees or software
These exclusions are part of the test to prevent traders from buying either low-value everyday items or one-off purchases in order to inflate their costs beyond 2%.
Any business that
Need help deciding if you are a Limited Cost Trader? Download my spreadsheet to help you decide
Check your Eligibility for a 1% discount on your Flat Rate Percentage
Certain businesses who are new to the Flat Rate Scheme are eligible for an additional 1% discount on their flat rate percentage.
Let’s suppose your effective date of VAT registration is 1 January 2018 your first year of VAT registration covers the year from 1 January 2018 to 31 December 2018.
Switching from Standard VAT Scheme to Flat Rate VAT Scheme
If you are already VAT registered and decide to more to the Flat Rate VAT scheme then you will only be entitled to claim for the additional 1% discount if you are within your first year of VAT registration.
If you switch from the standard VAT scheme to the Flat Rate VAT Scheme during your first year, you can claim your 1% discounted rate until the first anniversary of your VAT registration.
Check that the VAT Flat Rate Scheme benefits you
The benefits of the VAT Flat Rate Scheme include:
- Simplified VAT reporting and record keeping;
- A business registering for the first time may be eligible for an additional 1% reduction of their flat rate percentage for one year;
- Potentially making money from using a lower rate of VAT than the standard rate;
- Combining the Flat Rate Scheme with Cash Accounting meaning it can really benefit cash flow.
The VAT Flat Rate Scheme may not work for everyone and there is no legal requirement to join the scheme.
Joining the scheme may NOT be suitable if:
- You are expecting VAT repayments. For example, if you are a startup and need to incur costs which have VAT on them;
- You have regular input tax to claim above the ‘profit’ you will make.
How to Register for the VAT Flat Rate Scheme
You can register for the VAT flat rate scheme online or by post. I’ve put together this guide that walks you through the application process and shows you what information you need to provide.
Choosing to register for the VAT Flat Rate Scheme Online is easy enough to do yourself.
Joining the scheme can bring many benefits including helping cash flow and reduced administration.
Once you have decided that the VAT Flat Rate Scheme is right for you, then here’s how you can register online or by email.
There are three ways you can register for the VAT Flat Rate Scheme. The one you choose will depend on whether you are already registered for VAT or not.
1. How to Register Online
If you are already VAT registered then the simplest way to register for the flat rate scheme is online using at VAT600 FRS form.
If you are not registered for VAT then you can sign up to VAT and join the flat rate scheme at the same time. You can do this here and it involves setting up a Business Online account with HMRC.
2. How to Register By Email
If you are already VAT registered then you can register for the flat rate scheme online using a VAT600 FRS form and then email your application to:
If you are not currently registered for VAT, then you’ll need to follow step 1 and sign up to VAT.
3. How to Register By Post
If you are already VAT registered, then you can join the flat rate scheme by post.
You need to complete a VAT 600 FRS Flat Rate Scheme form. This can be completed online then printed and posted to HMRC at:
HM Revenue and Customs – Annual Accounting Registration Unit
77 Victoria Street
If you are not currently registered for VAT, then you’ll need to follow step 1 and sign up to VAT.
Bookkeeping and Record-Keeping for the Flat Rate Scheme
You need to keep details of all your invoices and purchases as well as some additional information regarding your flat rate percentage.
As with any VAT scheme, you must keep records and details of all returns you have submitted and your workings.
When it comes to the VAT Flat Rate Scheme there are some additional pieces of information you should make sure you keep too.
VAT Flat Rate Scheme Record Keeping
Keeping organised is the key to making your VAT easier and staying on the right side of HMRC.
Here are records you must make sure you are keeping when you operate under the VAT Flat Rate Scheme:
- the flat rate percentage you have used each quarter;
- breakdown of how you calculated the amount of VAT due or repayable;
- breakdown of your flat rate turnover used for calculating each VAT return;
- any amounts you have spent on capital asset purchases if you wish to claim back VAT;
- Copies of VAT invoices you have sent to your customers/clients detailing VAT charged at the standard rate;
- Bank statements.
Bookkeeping under the VAT Flat Rate Scheme
You can choose to use a spreadsheet or a bookkeeping software like Quickbooks to help you manage your VAT.
Remember you must show VAT at 20% when you invoice your customers but when you come to filling out your VAT return you’ll need to re-calculate your VAT using your flat rate percentage.
Start Filling Out Your VAT Returns
You will need to file your VAT returns either quarterly or annually, depending on the scheme you sign up to.
Under the flat rate VAT scheme, you still continue to complete the same VAT return as everyone else, but you need to amend your numbers for:
- Your flat rate percentage;
- Purchases depending
Read my step by step guide to Filling Out Your Flat Rate VAT Return, which includes what you need to include in each box.
An Example of How the VAT Flat Rate Scheme Works
Jane is an IT consultant and has an estimated turnover of £120,000 for the next 12 months.
She is eligible to use the VAT Flat Rate Scheme.
Jane looks up the applicable Flat Rate Fixed Percentage for her industry and it is 14.5%.
Every time Jane raises an invoice to one of her clients she must add 20% VAT onto this invoice.
However, when she submits her VAT return to HMRC, she will apply her fixed percentage of 14.5% to her net sales.
For example, if Jane has billed a total of £10,000 plus VAT during one quarter, she will have collected £2,000 (£10,000 x 20%) from her clients. She will pay HMRC £1,740 (£12,000 x 14.5%). She ‘profits’ £260 in this quarter.
This isn’t really profiting as such.
Jane may have paid expenses during the quarter on which she’s unable to claim back the VAT she paid.
The VAT Rate Percentage is set at an appropriate level to cover the cost of any VAT she pays.
So the £260 ‘profit’ represents a contribution towards what she has paid out.
Should You Join the VAT Flat Rate Scheme?
You can join the VAT flat rate scheme if you expect that your VAT taxable turnover in the next 12 months will be £150,000 or less.
Joining the Flat Rate Scheme will make your business administration easier but it also brings other benefits.
The VAT Flat Rate Scheme can be a really smart decision to make if you are self-employed, starting a new business or work in certain types of industries.
Here are some great reasons to join the VAT Flat Rate Scheme:
- You get a 1% additional discount on your flat rate percentage for your first year of VAT registration;
- You can generate a ‘profit’ for yourself because the rate that you pay VAT over to HMRC is lower than the standard rate of VAT, currently 20%;
- It simplifies your VAT reporting since you only need to report on income not expenses;
- You can still claim for VAT on capital assets you buy like a laptop;
- When combined with cash accounting, the Flat Rate Scheme can be really helpful for your cashflow.
As with any VAT scheme before you join the flat rate scheme you should make sure that it is right for you and your circumstances.
Knowing whether you should join the flat rate scheme can be a tricky decision to make.
Whilst I do advise that you get professional advice, you can start by trying my “Join the VAT Flat Rate Decision Spreadsheet” [2019 Excel Version].
Based on your own circumstances, the “Join the VAT Flat Rate Decision Calculator” will tell you:
- Whether you are entitled to the 1% rate discount;
- If you are affected by the regulations of Limited Cost Trader;
- Predicts which scheme would be most beneficial to you based on your estimations.
How to Handle Bad Debts
If you are in the unfortunate position of not being paid by a customer or client, then you may be able to claim for bad debt relief even though you are on the VAT Flat Rate Scheme.
Here are the rules on claiming for Bad Debt Relief and how you make your claim.
Bad Debt Relief and the VAT Flat Rate Scheme
Under the rules of the scheme, you pay VAT at a fixed rate which is lower than the standard rate of VAT (currently 20%).
Under the Flat Rate Scheme you cannot claim for VAT on purchases (apart from capital purchases over £2,000) so the lower rate you pay VAT at acts as a contribution towards any input VAT you have incurred.
If you find yourself in the position of not being paid by a customer or client, you may have incurred certain VAT costs to deliver your product or service to that person.
This means you are entitled to a contribution towards this input VAT regardless of whether your customer pays or not.
Bad Debt Relief Calculation
HMRC allows you to make a claim as follows:
- Work out the VAT on the unpaid Invoice
- Calculate the VAT that would have been paid if you were paid at your flat rate percentage
- Subtract step 2 from step 1
- Include the result of step 3 in your next VAT return
An Example of Bad Debt Relief under the VAT Flat Rate Scheme
Jane is an IT Consultant so her VAT flat rate percentage is 14.5%. Jane raised an invoice to her client for £1,200 plus standard VAT, total £1,440. After 6 months it transpires that her client is unable to pay the invoice so she wishes to claim for bad debt relief.
The total invoice value is £1,440, which includes VAT of £240 at the standard rate of 20%.
Under the rules of Jane’s flat rate scheme, she would need to pay VAT of £174 (£1,200 x 14.5%)
Deducting step 2 from step 1 results in £66 (£240 – £174)
Jane can claim £66 on her next VAT return.
Cash Accounting Under the Flat Rate Scheme & Bad Debt Relief
If you use the cash turnover method of accounting you can only claim for bad debt relief if:
- you have not been paid by your customer and it has been 6 months since you made the supplies
- you have not accounted for and paid tax on the supply
- you have written off the debt in your accounts
Updated 10 July 2019