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UK Flat Rate Scheme: How does it work?



How does it work?

With the VAT FRS, unlike the standard VAT, where you usually pay to HMRC the difference between what a business charges its customers for Sales VAT and what the business pays for Purchase VAT, with the FRS you will instead keep the difference between the VAT charged on your Sales, less the flat rate percentage.


Standard VAT Example:

VAT charged on Sales  @ 20% £1,600
VAT paid on Purchases @20% (£ 800)*
Amount owed to HMRC   £800


Flat Rate Example:

The business type - a museum

VAT charged on Sales  @ 20% £1,600
VAT Flat rate to be paid to HMRC at
an agreed rate @ 9.5 % of £1,600
Amount you get to keep  £1,448

Note: VAT on standard purchases can be claimed back, however VAT cannot be reclaimed back on your purchases under the FRS, since it is deemed the discounted fixed rate already considers this and has taken into account the VAT purchases. The only exception is on capital assets beyond the current  £2000 threshold.

Here is the guideline from the HMRC site for flat rate percentage for different types of business. For further inquires regarding which FRS percentage you should be using, please contact HMRC directly.