VAT Accounting Schemes – The VAT Flat Rate Scheme

29 August 2014

The VAT Flat Rate Scheme (FRS)

The VAT Flat Rate Scheme was introduced more recently than the other 2 schemes and has a much lower turnover threshold for eligibility, meaning fewer businesses can use it.

Its objective is to reduce the cost of VAT compliance. It does this by applying a fixed percentage to gross income, which builds in an allowance for deemed input tax, thus avoiding the need for detailed records of purchases and expenses. Invoices are still issued and received as normal. It is just the VAT accounting which is simplified.

The Scheme is available to businesses that expect their VAT exclusive taxable turnover (excluding expected sales of capital assets) in the next 12 months to be no more than £150,000. As with the other schemes, there is a tolerance threshold meaning businesses using the scheme can continue to do so until their taxable turnover increases to £230,000.

As the fixed percentage applies to all income, the largest advantage is to eligible businesses making only standard rated supplies. Although the fixed rate is designed to allow for typical zero-rated and exempt supplies by the type of business (as well as to give a set credit for input tax), users may be disadvantaged if they make a lot of that type of supply. It is always worth comparing the scheme against normal VAT accounting first, to ensure there is a benefit.

A table of Flat Rate Scheme rates is available from HMRC, which is usually only changed if there is a VAT rate change. It is important for the user to ensure their business has the correct classification. If their activity includes supplies in 2 or more sectors, the percentage to be used is that appropriate to the main activity as measured by expected turnover in the year ahead.

Joining the scheme is by completing an application on form online (if the business used HMRC’s online services to register for VAT) or by downloading the form and posting it to HMRC.