Do you know what the VAT Flat Rate Scheme (FRS) is? Many people are not aware of this simplified VAT scheme but it is worth considering as not only can it involve less administration but you could actually profit out of the scheme.

You are eligible to join the FRS if your estimated VAT taxable turnover (excluding VAT) in the next year will be £150,000 or less. There is some other small print to read which can be found here.

UPDATE – you can see a more up to date example of the flat rate scheme here.

Under traditional 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 your purchases.

If you use the Flat Rate Scheme you pay VAT as a fixed percentage of your VAT inclusive turnover. The actual percentage you use depends on your type of business. The percentages can be found here.

The drawback, however, is that you are generally not allowed to claim VAT back on your costs (although you may be able to claim back the VAT on capital assets worth more than £2,000). You will need to look at your business cost base and work out the value of your purchases that contain VAT as this will dictate if the FRS will be beneficial for you or not. If you have substantial costs containing VAT it may not be right for you, but it is worth checking.

As a simple example let’s imagine you are a self-employed journalist and you don’t incur any costs that contain VAT. In Entertainment or Journalism the FRS percentage is currently 12.5%. If you were to raise a sales invoice for £1,500 + VAT the gain that can be made through the FRS is shown below. Remember the FRS percentage is calculated from the total income including VAT.

Net Income 1,500
VAT @ 20% 300
Total Sales Invoice 1,800
FRS VAT due to HMRC @12.5% 225
Gain from using FRS (£300 – £225) 75

As a bonus you get a 1% discount to your FRS percentage for your first year of VAT registration!


On 23rd November 2016 HMRC announced changes to the flat rate scheme from April 2017 with regards to a new flat rate scheme category, the ‘limited cost trader’ – we have written an article below which should be read in conjunction with this article:

VAT Flat Rate Scheme Changes 2017 – Limited Cost Traders


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