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Understanding the Flat Rate VAT Scheme in QuickBooks Online

by Intuit•4• Updated 1 year ago

This article will cover everything you need to know about the flat rate scheme, from how to record it on your VAT return to how it shows up on your return.

The Flat Rate Scheme (FRS) is a popular way for businesses to pay VAT to HM Revenue and Customs (HMRC). Under the scheme, businesses charge a fixed rate of VAT on their sales, and can keep the difference between what customers are charged and the VAT the business pays on its own purchases.

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

How to set up FRS in QuickBooks Online

Assuming your business meets the eligibility criteria, you can follow these steps to set up FRS in QuickBooks Online. We'll also cover how to make adjustments on your VAT return, step-by-step.

How to record the Flat Rate Scheme on a VAT return

When preparing your VAT return, you'll need to record your total turnover including VAT in Box 6. To calculate the VAT due on these sales, you’ll need to multiply the flat rate percentage by the figure in Box 6.

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

Recording VAT under the Flat Rate Scheme works in the same way as under the Standard VAT Scheme. You simply enter the transactions as normal and select the same VAT rates you would apply normally. The only thing to keep in mind is that QuickBooks will calculate the Flat Rate VAT when you prepare your return, so there’s no need to worry about additional rates.

The difference between Flat Rate VAT Scheme and Standard VAT Scheme

Flat Rate VAT Scheme

The Flat Rate Scheme (FRS) is a method of VAT calculation whereby businesses pay a fixed percentage of their VAT inclusive turnover to HMRC. The actual percentage used is set by HMRC and depends on the business type.

If, for example, a business creates a sales invoice for £100 plus VAT using the FRS, they would owe HMRC the flat rate percentage of the gross of the invoice. So, if the flat rate percentage is 12% on an invoice for £120, then the business would owe HMRC £14.40.

It’s important to remember that applying VAT codes to your expenses is essential in order to get an accurate picture of your savings under the FRS. Without doing so, you may end up overestimating or underestimating your savings, which could put you at a disadvantage come tax time.

Note: You can’t reclaim any VAT incurred when using the flat rate, unless you buy a capital asset that is valued at over £2,000 including VAT.

Standard VAT Scheme

Under the Standard VAT Scheme, businesses calculate the VAT they owe to or can claim back from HMRC as the difference between the VAT they charge their customers and the VAT they pay on purchases. So, if a business creates a sales invoice for £100 plus VAT using the Standard scheme, they would owe HMRC £20.

This is done automatically in QuickBooks as soon as an invoice is saved, and businesses can see the total amount of savings in their VAT return. In our earlier example, the business would have saved £5.60.
You can learn more about the Flat Rate Scheme on the HMRC website.

How to apply accrual and cash accounting methods while on the Flat Rate Scheme

Accrual

To use the accrual method of accounting, businesses must apply the flat rate percentage to the VAT-inclusive total of sales that have their tax point within the VAT accounting period. The tax point is determined using the normal VAT rules for time of supply. If businesses issue VAT invoices, the date of invoice issuance is often used as the tax point.

Cash

Under the cash method, businesses apply the flat rate percentage to the VAT inclusive sales for which they have received payment in the accounting period. This lets businesses account for their VAT liability when they receive payment, and does not affect the time of supply (tax point).

How to join/leave the Flat Rate Scheme

To join, you’ll first need to check that you’re eligible for the VAT Flat Rate Scheme and if it’s right for your business. You can join online on the HMRC website.

How to leave the Flat Rate Scheme in QuickBooks Online

If you're thinking of leaving the Flat Rate Scheme, there are a few things you need to know.

You can leave the scheme at any time by writing to HMRC.
You will normally only leave at the end of a VAT accounting period.
HMRC will confirm the date you left the scheme in writing.
You must notify HMRC if there are significant changes to your business which could affect your ability to use the scheme, such as a change in ownership or a change in the way your business is run.
HMRC may take you off the flat rate scheme if they find that you have calculated your VAT incorrectly, or if you have become ineligible for the scheme but have not told them.
When you leave the Flat Rate Scheme, you can only rejoin it after a minimum of 12 months have passed.

Once HMRC confirms the date of your departure from the scheme, here’s how you can leave the scheme in QuickBooks:

The Taxes section in QuickBooks, and select Edit settings.
Untick the FRS box.
Select Standard or Cash as the new VAT accounting method.

Which Flat Rate Scheme VAT codes to use in which boxes on a VAT return

FRS VAT codes

Businesses paying a flat rate usually can’t reclaim VAT on purchases (although there are some exceptions for capital assets worth over £2,000). QuickBooks Online doesn’t support the reclaiming of full 20% VAT when reselling capital goods.

Read HMRC’s guideline for flat rate percentages for different types of business. For further inquiries regarding which FRS percentage you should be using, contact HMRC directly.

20.0% S - Standard Rate VAT

The standard VAT rate in the UK for most goods and services is currently 20%. VAT-registered businesses must charge VAT at the standard rate on all goods and services, unless they fall under another category.

Check the HMRC guidelines before charging at a different rate other than standard.

Code for sales form	Code for purchase form
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

The reduced rate may only apply to some goods and services in certain circumstances, depending on who the customer is. This reduced VAT rate applies to things like:

Children’s car seats and boosters
Insulation
Anti-smoking aids

Check the HMRC guidance to understand when this rate can be used.

Code for sales form	Code for purchase form
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

Goods and services that are categorised as 0% or zero-rated VAT are still taxable, but the VAT rate is charged at 0%. Sometimes the reduced rate only applies in certain circumstances, or it may depend on who the customer is.

You can expect zero percent VAT on:

Children’s clothes and footwear
Brochure and leaflet printing
Advertising services for charities

Check the HMRC guidance to understand when this rate can be used.

Code for sales form	Code for purchase form
VAT at FRS % to Box 1 Net Sale to Box 6	VAT at 0% to Box 4 Net Purchase to Box 7

Exempt

Goods and services that are VAT exempt aren’t taxable. This means that no VAT can be charged on them. These typically include:

Insurance
Medical health treatments
Sponsored charity events
Educational courses and training

Special rules apply for businesses that are exempt or partly exempt. Check the HMRC guidance to understand when this rate can be used.

Code for sales form	Code for purchase form
VAT at FRS % to Box 1 Net Sale to Box 6	Net Purchase to Box 7

20.0% RC SG - Standard reverse charge VAT for services

This rate is used for goods and services bought in another EU country but are classed at the standard rate in the UK. Check the HMRC guidance to understand when this rate can be used.

Code for sales form	Code for purchase form
Not applicable	+/- VAT at 20% to Box 4 +/- Net Purchase to Box 6

20.0% RC MPCCs - Domestic reverse charge VAT for computers

This rate is used for mobile phones and computer chips purchased in the UK. Check the HMRC guidance to understand when this rate can be used.

Code for sales form	Code for purchase form
Not applicable	+/- VAT at 20% to Box 1 and 4 +/- Net Purchase to Box 7 and 9

No VAT - Out of scope of VAT

No VAT is charged on goods or services that are exempt from VAT or are outside the scope of the UK VAT system. These transactions will not appear on your VAT returns.

No VAT applies in the following situations:

Anything you sell or supply when you’re not registered for VAT/or don’t need to be registered for VAT
Goods or services bought or sold outside of the EU
Goods or services bought or sold for personal use
Goods or services bought or sold but not as part of your business
Statutory fees and services, like MOT testing
Transport tolls for bridges, tunnels and roads
Welfare services provided by charities
Charity donations

Check the HMRC guidance to understand when this rate can be used.

Code for sales form	Code for purchase form
Not applicable	Not applicable

European Commission (EC) VAT codes

If your business is VAT-registered and you buy goods or services from another VAT-registered business in another EC Member State, you shouldn’t be charged VAT, as long as you give the supplier your VAT registration number.

The supplier will be responsible for using the reverse charge method to render the charge nil. The buyer is then responsible for recording the VAT transaction for that particular good or service. This way, it eliminates the need for merchants to register in the country where the supply is made.

Suppose you are the supplier and you are shipping goods to customers in an EC Member State, you shouldn’t charge VAT if they provide you with a valid VAT registration number. As their supplier, you need to use the reverse charge method to make the VAT nil.

Make sure you include the words ‘reverse charge’ on the invoice to fulfill the legal requirement. Here are some examples from HMRC:

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 didn’t receive a valid VAT number, use the correct VAT rate. For transactions that qualify, use one of the following EC VAT rates.

20.0% ECG - Intra EU B2B purchase of goods

For business to business transactions, the customer must pay any VAT using the reverse charge mechanism. The customer must act as though they are both the supplier and recipient of goods.

Code for sales form	Code for purchase form
Not applicable	+/- VAT at 20% to Box 2 +/- Net Purchase to Box 7 and 9

0.0% ECG - Intra EU B2B supply of goods

Used for the Intra EU business to business sale of goods. If the EU customer is not VAT-registered, charge them the appropriate UK VAT rate.

Code for sales form	Code for purchase form
VAT at FRS % from Box 6 to Box 1 Net Sale to Box 6 and 8	Purchase to Box 9 Doesn’t affect FRS gain/loss

20.0% ECS - Intra EU B2B purchase of services

In business to business transactions, the customer must use the reverse charge mechanism to account for any VAT due. The customer must act as though they are both the supplier and recipient of services.

Code for sales form	Code for purchase form
Not applicable	Does not affect any boxes

0.0% ECS - Intra EU B2B supply of services

Used for the Intra EU business to business sale of services. Charge the applicable UK VAT rate if the customer is not VAT-registered.

It’s critical to note the location of supply on services:

For business to business, the place of supply is the location of the customer (receiver of services)
For business to consumer, the place of supply is the location where the provider (business) is based

Code for sales form	Code for purchase form
Not applicable	Standard VAT to Box 1 and 4 Net to Box 6 and 7

0.0% RC - Intra EU Reverse Charge

Used for B2B transactions for the sale and purchase of mobile phones and computer chips within the EU.

Code for sales form	Code for purchase form
Net Sale to Box 1 (FRS amount on Sales) Gross to Box 6	Not applicable

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