Definition
The VAT Flat Rate Scheme is an optional UK HMRC scheme that lets small businesses pay VAT as a fixed percentage of their VAT-inclusive turnover instead of tracking VAT on every sale and purchase. The percentage depends on the business sector. Customers are still charged VAT at the normal rate on invoices.
Also called: Flat Rate Scheme, FRS, Flat rate VAT
VAT Flat Rate Scheme in practice
A business can join if its expected VAT taxable turnover for the next 12 months is 150,000 GBP or less, excluding VAT, and must leave once its total income passes 230,000 GBP. Newly VAT-registered businesses get a 1 percent discount on their flat rate in the first year.
Businesses that spend very little on goods count as limited cost traders and must use a flat rate of 16.5 percent, whatever their sector. For many service businesses this removes most of the benefit of the scheme.
Under the scheme you usually cannot reclaim VAT on purchases, except on single capital assets costing 2,000 GBP or more including VAT. Invoices to VAT-registered clients still show the standard VAT rate and amount, so clients can reclaim it as usual.
Example
A business on a 12 percent flat rate invoices 1,000 GBP plus 200 GBP VAT. It keeps the full 1,200 GBP and pays HMRC 12 percent of it, which is 144 GBP.
Frequently Asked Questions
Do I show the flat rate on my invoices?
No. Your invoices show VAT at the normal rate, usually 20 percent. The flat rate only affects how much you pay HMRC, not what your clients are charged.
Is the Flat Rate Scheme worth it?
It saves admin and can save money for businesses with few VAT-bearing costs in a sector with a low rate. Limited cost traders at 16.5 percent often pay more than under normal VAT accounting.
Related terms
- VAT VAT (value added tax) is a consumption tax charged at each stage of the supply chain on the value added, used in the EU, UK, and more than 160 other countries.
- VAT registration number A VAT registration number is the unique number HMRC gives a business when it registers for VAT in the UK, made up of nine digits with a GB prefix.
- Making Tax Digital Making Tax Digital (MTD) is a UK government program that requires businesses to keep digital tax records and submit returns to HMRC using compatible software.
- Input tax credit An input tax credit is the VAT or GST a registered business paid on its own purchases, which it can deduct from the VAT or GST it collected on its sales.
- Cash basis Cash basis accounting records revenue when payment is actually received and expenses when they are actually paid.
This page is for general information only and is not legal, tax, or financial advice. Rules change and vary by location, so consult a qualified lawyer or accountant about your situation.