What is the VAT Flat Rate Scheme (FRS)?
HMRC introduced the Flat Rate VAT Scheme to help small businesses and the self-employed simplify their VAT reporting. With the FRS, you still charge your clients 20% VAT, but will no longer have to pay HMRC the full 20%. You will now pay a fixed percentage of your VAT inclusive of turnover, depending on your business type. You won’t need to calculate the exact VAT you’ve paid on your business expenses either, bonus! If you’re a contractor or a sub-contractor, you may even be eligible to backdate your VAT registration up to four years. See our section on Backdated Effective Date of Registration in our guide to VAT.
How does the VAT Flat Rate Scheme (FRS) work?
As an example, if you work in construction you will pay VAT over to HMRC at 14.5%, whereas couriers or taxi drivers pay over at 10%. The difference between what you charge and what you pay to HMRC is yours to keep. See some examples below:
|Type of Business||Current VAT Flat rate (%)|
|Architect, civil and structural engineer or surveyor||14.5%|
|Computer and IT consultancy or data processing||14.5%|
|General building or construction services*||9.5%|
|Labour-only building or construction services*||14.5%|
|Limited cost trader||16%|
|Transport or storage, including couriers, freight, removals and taxis||10%|
|Business services not listed elsewhere||12%|
|Any other activity not listed elsewhere||12%|
NB – irrespective of your flat rate percentage, you also receive a 1% discount if you’re in your first year of registration.
*Labour-only building or construction services are building services in which the value of materials supplied is less than 10% of the turnover.
How do I register for the VAT Flat Rate Scheme?
Flat Rate Scheme registration is easy with us. Call us on 01252 704 030 and we’ll help to find out if you’re eligible and get you registered.
How do I calculate what I should pay through the VAT Flat Rate Scheme?
To calculate how much VAT you have to pay to HMRC, simply add 20% VAT to your total Gross Earnings (Earnings before any Deductions or Additions) and then apply your Flat Rate percentage (as per your business type) to this figure. This percentage is how much of your “Total Sales” you need to pay to HMRC. Use our handy VAT Rebate Calculator if you’re unsure.
What can be claimed under the VAT Flat Rate Scheme?
'Capital Goods' are goods used by your business that do not get used up except through normal wear and tear. With the FRS, you can reclaim the VAT that you've been charged for a single purchase on capital expenditure goods where the amount, including VAT, is £2000 or more (Providing its sole use is for business!).
How do I leave the VAT Flat Rate Scheme?
You can voluntarily leave the Flat Rate Scheme at any chosen point however, if you leave the Flat Rate Scheme, you cannot re-join for 12 months.
By leaving the FRS, it does not mean you will be deregistered from VAT.
To voluntarily deregister from VAT, your annual turnover must be below £85,000. If you wish to deregister from VAT and your turnover is below the above amount, please contact our VAT Department and we can advise you of the best next steps.
What is a Limited Cost Trader?
You’re a Limited Cost Trader If the amount you spend on relevant goods* including VAT is either:
Less than 2% of your VAT flat rate turnover (in a prescribed accounting period)
Greater than 2% of turnover including VAT, but less than £1000 per year (if the prescribed accounting period is one year). If it is not one year e.g. quarterly VAT returns, the figure is the relevant proportion of £1000, for a quarterly return this is £250
*Relevant goods are physical items or materials that are only used for business purpose. If you use these items for both business and personal they do not qualify, such as a mobile phone used for both. Examples of relevant goods items include:
Personal Protective Equipment (PPE)
Materials such as brick, timber or aggregate
Vehicle costs including fuel if you are operating in the transport sector, using your own or leased vehicle
Following the change in the law from April ’17, anyone who uses the FRS method of VAT will need to pass an expenses test to stay on their current percentage rate. Those who fail this test are referred to by the HMRC as a ‘Limited Cost Trader’. If you have failed this test, the percentage you pay back to HMRC will change to 16.5%.
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