For many small businesses, VAT accounting can be complex, time-consuming, and resource-intensive.

The VAT Flat Rate Scheme (FRS) offers a simplified approach to VAT calculations, but is it right for your business?

As chartered accountants offering professional VAT advisory services, we’ve created this comprehensive guide to help you understand the scheme and make an informed decision.

What Does the VAT Flat Rate Scheme Offer?

The VAT FRS allows eligible businesses to calculate their VAT payments as a fixed percentage of their VAT-inclusive turnover, rather than calculating the difference between VAT charged to customers and VAT paid on purchases.

The percentage varies by industry sector, making it crucial to understand which rate applies to your business.

Who is Eligible for the VAT Flat Rate Scheme?

Your business can join the scheme if:

• You’re VAT-registered
• Your expected VAT taxable turnover for the next 12 months is £150,000 or less (i.e. everything that is sold that’s not exempt from VAT)
• You haven’t left the scheme in the last 12 months

However, you cannot join if you:

• Use a margin scheme
• Use a capital goods scheme
• Are currently using the VAT cash accounting scheme

How the VAT Flat Rate Scheme Works

Calculating Your VAT Payment

Instead of tracking input and output VAT, you:

1. Calculate your VAT-inclusive turnover
2. Apply your sector’s flat rate percentage
3. Pay the resulting amount to HMRC

VAT Rates for Specific Sectors (FRS7200)

Different business sectors have different flat rates, typically ranging from 4% to 16.5%.

For example:

• Accountancy and bookkeeping: 14.5%
• Computer and IT consultancy: 14.5%
• Management consultancy: 14%
• Education: 12%
• Solicitors and legal services: 14.5%
• Manufacturing of packaging: 9%
• Food retail: 4%

The full list of trade sectors and their corresponding flat rate percentages is available here.

Limited Cost Businesses

A higher rate of 16.5% applies if you’re a “limited cost business”, i.e. one that spends less than 2% of turnover or less than £1,000 per year on goods (not services). Where costs may be close to 2% of turnover, such a business may need to provide individual quarterly calculations to ascertain whether they use the limited cost business percentage of 16.5% or the FRS which applies to their sector.

Advantages of the VAT Flat Rate Scheme

Some businesses may benefit by adopting the VAT FRS. Benefits include:

Simplified administration

• No need to record input VAT on purchases
• Simpler VAT return processes

Potential financial benefits

• First-year discount of 1%
• Possible VAT savings for some businesses
• Predictable VAT payments

Cash flow management

• Known percentage makes budgeting easier
• Simplified calculations aid financial planning

Considerations of the Scheme

Potential higher costs

• • Some businesses may pay more VAT than under standard accounting
  • Limited-cost businesses potentially face higher flat rates
  • Cannot reclaim VAT on most purchases

Restrictions

1. • Limited ability to reclaim VAT on capital assets
   • Must monitor turnover to ensure continued eligibility
   • Cannot use other VAT schemes simultaneously

Examples of the VAT Flat Rate Scheme 

Example 1: Standard Service Business

A consulting firm with a quarterly turnover of £30,000 (including VAT):

• Sector rate: 14.5%
• VAT payment = £30,000 × 14.5% = £4,350

Example 2: Limited Cost Business

A freelance designer with a quarterly turnover of £24,000 (including VAT):

• Limited cost rate: 16.5%
• VAT payment = £24,000 × 16.5% = £3,960

How to Decide Whether This Scheme is Right for You

Before joining the scheme, consider the following steps:

1. Calculate your quarterly VAT payments under both systems
2. Review your business cost structure
3. Assess administrative resources
4. Consider future growth plans
5. Evaluate sector-specific implications

If you decide to join:

1. Apply online through your HMRC account
2. Update your accounting software
3. Train staff on new procedures
4. Monitor turnover regularly
5. Keep records of your flat rate calculations

When to Leave the VAT Flat Rate Scheme?

You must leave the VAT FRS scheme if:

• Your turnover exceeds £230,000 (including VAT) in the last 12 months
• You expect to exceed this threshold in the next 12 months
• Your business structure changes significantly

Consult Hamlyns for Professional VAT Accounting Assistance 

Our VAT experts can assess whether the scheme is right for your business. Our professional accounting specialists can help you calculate potential savings or cost reductions, help with registration and implementation, ensure compliance with HMRC requirements, and provide ongoing support to help you achieve your business goals.

Contact us today for a detailed analysis of how the VAT Flat Rate Scheme could benefit your business.