QuickBooks Online Flat Rate Scheme explained

QuickBooksHelp · ‎February 07, 2019

Businesses on the Flat Rate Scheme (FRS) pay a fixed amount of VAT to HM Revenue and Customs (HMRC), and can keep the difference between what customers are charged and the VAT the business pays on its own purchases.

To turn on FRS or make adjustments in QuickBooks, click here.

What's the difference between FRS and standard VAT?

When you use the Flat Rate Scheme, you pay VAT as a fixed percentage of your VAT inclusive turnover. The actual percentage you use depends on your type of business.

If you create a sales invoice on FRS VAT for £100 plus VAT, you would owe HMRC the flat rate percentage of the gross of the invoice. Say for example the flat rate percentage is 12% on an invoice for £120, then you would owe HMRC £14.40.

When you use the Standard VAT scheme, the VAT you pay to HMRC or claim back is the difference between the VAT you charge your customers and the VAT you pay on purchases. For example, if you create a sales invoice on Standard VAT for £100 plus VAT, you would owe HMRC £20.

This is done for you as soon as the invoice is saved in QuickBooks, plus you'll be able to see the total amount of savings in your VAT return. In the example above, you would have saved £5.60.

Standard vs Flat Rate scheme example

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

Flat Rate Scheme (in this example the business type is a museum)
Net sales amount	£8,000
VAT charged on Sales at 20%	£1,600
Gross amount	£9,600
VAT Flat rate to be paid to HMRC at an agreed rate at 9.5 % of £9,600	£912
Amount you get to keep	£8,688

What are the benefits of FRS?

FRS simplifies your VAT accounting by calculating your VAT payments as a percentage of your total VAT-inclusive turnover. Making it fast to prepare and submit VAT returns.
Though you still need to show a VAT amount on each sales invoice, you don't need to record how much VAT you charge on every sale in your accounts nor do you need to record the VAT you pay on every purchase.
Although you cannot reclaim VAT on purchases, it is taken into account in calculating the flat rate VAT percentage, and you may be able to claim back the VAT on capital assets worth more than £2,000.
You receive a one percent reduction in your flat rate during your first year of VAT registration. This discount applies even if the flat rate percentage for your industry changes during your first year of registration. This means you can take one percent off the flat rate you apply to your turnover until the day before your first anniversary of becoming VAT registered.

Note: This reduction runs for the 12 months following the date you register for VAT, not the date you join the Flat Rate Scheme. You cannot apply the reduction if you register for VAT 12 months after you were required to do so.

If your business is a transfer of a going concern (TOGC), you are entitled to apply the one percent reduction from the date of the transfer.

Important: Make a note of the date on which you will need to change your VAT percentage rate, at the end of the reduced rate period, so that you don't underpay VAT. For more information, go to the HMRC website.

Is the FRS right for your business?

The Flat Rate Scheme may not be right for you and your business if:

you buy mostly standard-rated items.
you regularly receive a VAT repayment under standard VAT accounting.
you make a lot of zero-rated or exempt sales.

For more details please go to the HMRC website.

How to join the scheme

You can join the scheme by applying to HMRC if:

you’re a VAT-registered business.
your estimated VAT taxable turnover, excluding VAT, in the next year will be 150,000 GBP or less.

Note: Your VAT taxable turnover is the total of everything that you sell during the year that is liable for VAT. It includes standard, reduced rate or zero rate sales or other supplies. It excludes the actual VAT that you charge, VAT exempt sales and sales of any capital assets.

To learn more about FRS eligibility and exceptions and if the scheme is right for you and your business, check out the HMRC website.

You can use the scheme with either cash or accrual accounting methods.

How to record the Flat Rate Scheme on a VAT return

When preparing your VAT return, Box 6 will reflect the tax inclusive amounts of all sales during the period. The VAT due on sales is then calculated by applying the flat rate percentage against the figure in Box 6.

For example, in Box 6 the gross net sales is £1,000 and the flat rate percentage is 12.5%. Multiply £1,000 by 0.125 to get the amount owed to HMRC, which is £125.

Recording VAT on the Flat Rate Scheme works the same way as on the standard scheme. Simply enter the transactions as normal and select the same VAT rates you would apply normally. There are no additional rates required to account for FRS, as QuickBooks calculates it for you when you prepare your return.

Gain/Loss by FRS

You'll also notice an additional entry when preparing your VAT return labelled 'Gain/Loss by FRS'. This is amount is how much you've saved or lost by being on the Flat Rate scheme for the given period. This is measured by comparing your sales for the period at the reduced percentage against what you would have paid at 20%.

Gain/Loss by FRS also factors in expenses that you could have claimed and Exempt sales that you would not have paid. If the number of expenses and exempt sales are more than your standard sales, this will show a negative value in the Gain/Loss entry, meaning you have made a loss by being on the Flat Rate scheme.

This value is posted to an income account in your chart of accounts called 'Savings by FRS' at the moment of filing. At the end of the financial year, you can use this value to determine how much you have saved or lost by being on the Flat Rate Scheme.

FRS accrual and cash accounting methods

To use the accrual method, apply the flat rate percentage for your business to the VAT inclusive total of the sales that have their tax point in the VAT accounting period. Tax points are worked out using the normal VAT rules for time of supply. If you issue VAT invoices, that is often the date you issue an invoice.

To use a cash method, apply the flat rate percentage to the VAT inclusive sales for which you have received payment in the accounting period. This method allows you to account for your VAT liability when you receive payment. It does not affect the time of supply (tax point).

FRS VAT codes

When using the Flat Rate Scheme, you will find that some of the codes will post differently than on Standard VAT.

UK VAT Codes

VAT Code/Rate	Description	How does this report on my VAT 100 return?
VAT Code/Rate	Description	Code used on sales form	Code used on purchase form
20.0 % S	Standard rate VAT (from January 4, 2011 forward) If you are registered for VAT, you have to charge VAT at the standard rate on all goods and services you supply, unless they fall into another category. Before using anything other than the standard rate, go to HMRC's website to find out what rate of VAT applies in any particular set of circumstances.	VAT at FRS% to Box 1 Net Sale to Box 6	VAT at 20% to Box 4 Net Purchase to Box 7
5.0% R	Reduced rate VAT A reduced rate of VAT applies to some goods and services - including items such as domestic heating fuel and children's car seats. Sometimes the reduced rate only applies in certain circumstances, or it may depend on who the customer is. It's important to read the detailed rules on HMRC's website to understand when the reduced rate can be used.	VAT at FRS% to Box 1 Net Sale to Box 6	VAT at 5% to Box 4 Net Purchase to Box 7
0.00% Z	Zero rate VAT Some goods and services are zero-rated. This means they are taxable for VAT, but the VAT rate is zero percent. Sometimes the reduced rate only applies in certain circumstances, or it may depend on who the customer is. Read the detailed rules on HMRC's website to understand when the zero rate can be used.	VAT at FRS% to Box 1 Net Sale to Box 6	VAT at 0% to Box 4 Net Purchase to Box 7
Exempt	Exempt Some goods and services are exempt from VAT. These include: • insurance (but there is an Insurance Premium Tax (IPT) that may apply instead) • some services from doctors and dentists • some types of education and training Special rules apply for businesses that are exempt or 'partly exempt'. Please go to HMRC's website for further details.	VAT at FRS% to Box 1 Net Sale to Box 6	Net Purchase to Box 7
20.0% RC SG	Default reverse charge VAT code for services.	N/A	+/- VAT at 20% to Box 4 Net to Box 6
20.0% RC MPCCs	Reverse charge for the purchase of computer chips and mobile phones.	N/A	+/- VAT at 20% to Box 1 & 4 +/- Net Purchase to Box 7 & 9
No VAT	Outside the Scope of VAT Some goods and services are outside the scope of VAT and are not reported on the VAT return. This includes anything you: • sell (or otherwise supply) when you're not registered for VAT - and you don't need to be registered • buy or sell outside the European Union (EU) • sell (or otherwise supply) but not as part of your business - for example, if you occasionally receive income from sources such as leisure activities or hobbies • buy and sell for your own personal use, such as a hobby Other goods and services outside the scope of VAT include: • donations to charity freely given by a business where the giver does not receive anything in return • statutory fees and services, e.g., MOT testing, congestion charge • tolls for bridges, tunnels and roads operated by public authorities • low cost welfare services provided by charities	N/A	N/A

EC VAT codes

As a business that is registered for VAT, if you purchase goods from another business that is registered for VAT in an EC Member State, you should not be charged VAT if you give the supplier your VAT registration number. The supplier will then charge you under the reverse charge mechanism and you can then account for the VAT at the rate applicable in your country.

If you ship goods to a customer in an EC Member State, you should not charge VAT if your customer supplied a valid VAT registration number. You can check the VAT number at the European Commission website. You then charge your customer under the reverse charge mechanism. The invoice must include the words “reverse charge”.

Some examples from HMRC that fulfil the legal requirement are:

Reverse charge: VAT Act 1994 Section 55A applies
Reverse charge: S55A VATA 94 applies
Reverse charge: Customer to pay the VAT to HMRC

If you do not receive a valid VAT number, you must apply the applicable VAT rate. For example, VAT charged at 20% is VAT code 20% S.

For qualifying transactions, use one of the following EC VAT codes:

VAT Code/Rate	Description	How does this report on my VAT 100 return?
VAT Code/Rate	Description	Code used on sales form	Code used on purchase form
20.0% ECG	Intra EU B2B purchase of Goods (after 4th January 2011) Used for Intra EU B2B (business to business) purchase (acquisition) of goods after 4th January 2011. In B2B transactions, it is the customer who must account for any VAT due via the reverse charge mechanism (i.e. the customer must act as if they are both the supplier and the recipient of the goods).	N/A	+/- 20% VAT to Box 2 Net to Box 7 & 9
0.0% ECG	Intra EU B2B Supply of Goods Used for Intra EU B2B (business to business) sale (supply) of goods. If the EU customer is not VAT-registered, then the applicable UK rate of VAT is charged.	VAT at FRS% from Box 6 to Box 1 Net Sale to Box 6 & 8	Purchase to Box 9 Does not affect FRS gain/loss
20.0% ECS	Intra EU B2B purchase of Services (after 4th January 2011) Used for Intra EU B2B (business to business) purchase of services after 4th January 2011. In B2B transactions, it is the customer who must account for any VAT due via the reverse charge mechanism (i.e. the customer must act as if they are both the supplier and the recipient of the services).	N/A	Does not affect any boxes
0.0% ECS	Intra EU B2B Supply of Services Used for Intra EU B2B (business to business) sale of services. If the EU customer is not VAT-registered, then the applicable UK rate of VAT is charged. It is important to note that the Place of Supply on services changed from January 2010 as follows: • For B2B (business to business), the place of supply is where the customer (receiver of services) is based. • For B2C (business to consumer) the place of supply is where the business (provider of services) is based.	N/A	Standard VAT to Box 1 & 4 Net to Box 6 & 7
0.0% RC	Intra EU Reverse Charge Used for Intra EU B2B (business to business) transactions on computer chips and mobile phones. (Notice 735 refers).	Sales Box 1 (FRS amount on Sales) Gross to Box 6	N/A

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.

Reclaiming full 20% VAT when reselling capital goods is not supported in QuickBooks Online.

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