Flat Rate VAT Scheme
The Flat Rate VAT Scheme (FRS) was introduced by HMRC so that small businesses could be relieved from some of the administrative burden of being VAT registered. It makes life for small business owners much simpler, as they only need to make one calculation to work out their VAT liability.
You can join the FRS if the estimated turnover of your business in its financial year, exclusive of VAT is £150,000. This includes all of your sales that are taxable for VAT purposes, so any supplies that you make which fall under the standard rate, reduced rate or zero rate scales. Don’t worry if you’re not sure whether that applies to you, we’ll make sure that we help you each step of the way. Once you’ve joined the scheme, you can stay in it until your turnover gets to £230,000 in your financial year.
If you’re already VAT registered, you can simply fill in the application to join the FRS form, and as soon as HMRC notify you of your acceptance onto the scheme, you can apply the FRS rules. Until that point, you have to apply the standard VAT rules. If you’re not already VAT registered, you just need to send the FRS application form along with your VAT1 form. It’s worth noting that you can’t use the FRS scheme if you’ve been convicted of any offense related to VAT, been issued a penalty for any offense involving dishonesty, or if you have ceased to be operate the FRS, but all of these only apply in the preceding 12 months.
If your business is registered under the FRS, the general rule is that you don’t reclaim any VAT that you’ve paid on purchases. There is an exception to this rule, relating to capital purchases over £2000. If anything like that arises, the best thing to do is to speak to your accountant who’ll talk you it.
The FRS works using a predetermined percentage that will be applied to all VAT-able supplies for the VAT period. The figure must include turnover plus VAT collected. You’ll still always need to charge VAT at the standard rate, as your customers will be using that for their own VAT system.
The percentage can range from 4% to 14.5% depending on the sector that your business operates in (these percentages are listed further through this document), and in the first year of VAT registration a further 1% discount to the stated rate also applies. If you’re not sure which percentage applies to you, then we’ll help you work it out, but the general rule is that whichever portion of your business turnover is the largest should be the one that points to your category under the scheme.
