What is it?
The VAT Flat Rate Scheme is an alternate way to pay VAT, in which you pay a certain percentage and keep the difference.
The Flat Rate scheme can be used by businesses with a turnover of less than £150,000. It’s designed to simplify the VAT process – particularly for freelancers, contractors and small businesses.
How does Flat Rate work?
In the traditional VAT scheme, you have to calculate the amount you owe based on how you much you charge customers and how much you can reclaim from your purchases.
Flat Rate VAT works differently. You charge VAT to your customers as you normally would, but you pay HM Revenue and Customs a set percentage of your total sales regardless.
The percentage will depend on your industry or trade, with some examples listed below and a full list available on the Gov website.
|Type of business
|Current VAT flat rate (%)
|Accountancy or book-keeping
|Architect, civil and structural engineer or surveyor
|Catering services including restaurants and takeaways
|Computer and IT consultancy or data processing
|Computer repair services
|Entertainment or journalism
|Estate agency or property management services
|General building or construction services*
|Hairdressing or other beauty treatment services
|Hiring or renting goods
|Hotel or accommodation
|Labour-only building or construction services*
|Laundry or dry-cleaning services
|Library, archive, museum or other cultural activity
|Retailing food, confectionery, tobacco, newspapers or children’s clothing
|Retailing vehicles or fuel
|Sport or recreation
The flat percentages charged vary according to industry as some businesses can reclaim more VAT than others as they have more goods to buy.
VAT Flat Rate Scheme for a limited cost business
You’ll be classed as a “limited cost business” if the total cost of your goods costs less than 2% of your turnover. You’ll meet the criteria if your costs more than 2% but still less than £1,000 a year.
If you only spend this small amount, then you’ll have to pay a higher rate of 16.5%.
Why use Flat Rate VAT?
One of the main advantages of using the Flat Rate scheme is that it can save small businesses a lot of time.
As you’re only paying Flat Rate VAT payments, you can keep the difference between what you charge your customers and what you pay to HMRC.
As an added bonus, you’ll get a 1% discount if it’s your first year of being a VAT-registered business.
However, you can only reclaim VAT on capital assets that cost over £2,000 including VAT. If you do reclaim this, then you’ll have to pay standard VAT on the asset if you sell it on.
If you use the Flat Rate VAT scheme, then you can’t reclaim VAT on anything else.
Joining the VAT Flat Rate scheme
There are two ways to join the VAT Flat Rate scheme:
- Fill in the online form when you register for VAT.
- Fill in a VAT600 FRS form and send it to the address on the form.
When you’ve been successful, you’ll get confirmation on your VAT online account.