When you use standard VAT accounting, the VAT you pay to HMRC or claim back from them is the difference between the VAT you charge your customers and the VAT you pay on purchases.
When you use the Flat Rate Scheme (FRS), you pay VAT as a fixed percentage of your VAT inclusive turnover. The actual percentage you use depends on your type of business.
Accrual and cash accounting methods on the Flat Rate Scheme
To use the accrual method on the Flat Rate Scheme, you 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 on the Flat Rate Scheme, you 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).
Who can join the Flat Rate Scheme?
You can join if your estimated VAT taxable turnover, excluding VAT, in the next year will be 150,000 GBP or less.
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.
The Flat Rate Scheme simplifies your VAT accounting by calculating your VAT payments as a percentage of your total VAT-inclusive turnover. 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 GBP.
During your first year of registration, the flat rate is also discounted one percent.
Tell me more
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.
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.
The Flat Rate Scheme might not be right for you 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.
How to leave the Flat Rate Scheme
You may leave the scheme at any time by telling HMRC, though you will normally leave at the end of a VAT accounting period. HMRC will confirm the date you left the scheme in writing. You must notify them if there are significant changes to your business which may affect your eligibility to use the scheme. HMRC may also take you off the scheme if they find that you have calculated your VAT incorrectly or that you have become ineligible but have not told them. If you leave the Flat Rate Scheme, you must wait at least 12 months before you rejoin.
For more information, consult your accountant or go to the HMRC website.