VAT Flat Rate Scheme in the UK
The Value Added Tax (VAT) Flat Rate Scheme is a simplified VAT accounting method offered by the UK government for small businesses. The scheme aims to reduce the administrative burden for businesses by simplifying the VAT calculations and record-keeping.
Under the VAT Flat Rate Scheme, the eligible businesses calculate their VAT liability by applying a fixed flat rate percentage to the gross turnover to arrive at the VAT due. VAT calculation does not recover input tax, which means input tax is built into the flat rates.
The rate to be applied depends on the business’s industry sector. Apart from assessing a business that its industry sector is included in the rate list, it also has to fulfil other conditions before joining in the VAT Flat Rate Scheme. Once confirmed, the business can choose to join the scheme when submitting the VAT registration application.
When a business is first time VAT-registered, rejoin the scheme if meeting the requirements again, or is transferred as a going-concern can get a 1% discount in the first year.
Kaizen can provide assistance with applying for registering VAT Scheme. Businesses registering for VAT for the first time and opting in to the flat rate scheme, our service fee is ?00. For businesses that have already registered for VAT but apply to change from a standard rate to flat rate scheme, our service fee is ?00.
- Value Added Tax (VAT) Flat Rate Scheme (FRS)
The Flat Rate Scheme is designed to reduce the administrative burden of VAT calculation of sales and purchases records. The scheme applies a fixed flat rate percentage to the gross turnover to arrive at the VAT due. Fixed rate percentages, which are lower than the standard rate, vary depending on the type of business listed by HMRC.
- Tax Rates
The rate of the VAT Flat Rate Scheme varies depending on the type of business, and the rate is usually between 4% and 16.5%. If you need to check the corresponding VAT flat rate for specific business type, please contact us. The flat VAT rates that are eligible for common business types are shown in the table below:-
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Type of business
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VAT flat rate %
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Retailing food, confectionery, tobacco, newspapers or children’s clothing
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4
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Wholesaling food
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7.5
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Transport or storage, including couriers, freight, removals and taxis
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10
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Computer repair services
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10.5
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Management consultancy
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14
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Computer and IT consultancy or data processing
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14.5
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The choice of VAT Flat Rate Scheme should depend on the cost of trade and input VAT in different industries. However, if the business is a Limited Cost Trader, the tax rate for the business must use the percentage of 16.5% for the VAT Flat Rate Scheme. A Limited Cost Trader is defined as VAT-inclusive Purchases made in a quarter that are less than 2% of their VAT-inclusive sales, or more than 2% of its VAT inclusive sales in the quarter but less than ?50. VAT-inclusive Purchases refer to the operating costs of the business, but do not include food and beverages incurred for the business or its employees, assets, vehicles, vehicle parts and fuel for transportation business.
- Eligibility to join FRS
To qualify for joining the VAT FRS, the following conditions must meet if:
(1)
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a business sector is eligible to be registered for VAT;
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(2)
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the annual taxable turnover, excluding VAT, for the next year is forecast lower than ?50,000. However, if the forecast had no reasonable basis, HMRC may exclude a business from the scheme immediately, or from the date that the ineligible use began;
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(3)
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a business has not left the scheme in the past 12 months; and
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(4)
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a business is not associated with other VAT- registered business.
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- Advantages of joining VAT Flat Rate Scheme
There are numbers of advantages to use FRS:-
(1)
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Simplified Accounting: The scheme significantly reduces the administrative burden of VAT accounting for eligible businesses, saving time and resources. |
(2)
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Cash Flow Benefits: As business pay a fixed percentage of their gross turnover, there is potential for cash flow advantages, especially if they charge more VAT on their sales than they pay under the Flat Rate Scheme. |
(3)
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Less Record-Keeping: Under the scheme, businesses do not need to keep detailed records of input VAT on purchases, further simplifying accounting procedures. |
Business will not benefit from the FRS:
(1)
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the business buys and sells goods for customers and suppliers outside the UK; |
(2)
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the business usually has more input tax than output tax, that is to reclaim VAT from HMRC; or |
(3)
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a business may pay more VAT on the Flat Rate than using other VAT Schemes. |
- Reduction of 1% for new VAT FRS registration
Under the Flat Rate Scheme arrangements, the 1% reduction is to run for the first 12 months following the date of registration for VAT and not the date joining the Flat Rate Scheme. However, a business will not be entitled the 1% reduction if the joining of Flat Rate Scheme is 12 months after the date of registration for VAT.
If a business is a transfer of a going concern, the business will be entitled to have the 1% reduction for 12 month from the date of the transfer.
- Conditions to come out from FRS
A business must leave the scheme if one of the conditions is met:
(1)
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No longer eligible to be in it, e.g. the business has changed its business sector, and will not be eligible to rejoin for a period of 12 months. |
(2)
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On the anniversary of joining, turnover in the last 12 months was more than ?30,000 (including VAT) , or expected to over in the next 12 months. |
(3)
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Total income in the next 30 days alone is expected to be more than ?30,000. |
- Flat Rate Calculation Example
Under the VAT Flat Rate Scheme, eligible businesses pay a fixed rate of VAT on their total VAT-inclusive turnover, and do not reclaim any VAT on expenses, unless they are charged on a single purchase of capital expenditure goods where the amount of the purchase, including VAT, is ?,000 or more.
Example of how to calculate the tax liability
Tax liability = ‘VAT inclusive turnover?x Flat Rate %
Step 1 - A trade ?,000, add Standard rate 20% to make the invoice total = ?,200 which is ‘VAT inclusive turnover?
Step 2 - For a business in Computer repair services, the VAT flat rate is 10.5%.
Step 3 - Tax liability = ‘VAT inclusive turnover?x Flat Rate %
?26.00 = ?,200 x 10.5%
The above results show that businesses should pay ?26 in tax to HMRC and cannot claim a refund of input VAT on costs associated with this sale, such as VAT paid on materials purchased to repair computers.
- Kaizen’s Services and Fee
By entrusting VAT matters to Kaizen’s professional accountants, the risk of non-compliance can be minimized.
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No.
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Service
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Fee (?
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1
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Standard Rate VAT Registration
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300
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2
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Applying VAT Flat Rate Scheme after VAT has already been registered
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200
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3
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VAT Registration with Flat Rate Scheme
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400
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4
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Leave VAT Flat Rate Scheme
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300
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5
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De-registration of VAT Registration
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300
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6
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VAT Return Submission quarterly
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200 +
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- Changes in tax rate of Flat Rate Scheme
If a business changes its operations, HMRC must be notified in writing within 30 days of the change taking place and the tax payable should be calculated at the rate applicable to the changed operations. If the percentage of flat rate changed more than once in a tax accounting period, the business should calculate the tax payable at each rate that has changed during that tax period when calculating the VAT liability.
HMRC uses a range of measures to encourage people to register for VAT on time, send in accurate VAT Returns and make payments on time. Misunderstandings and errors in VAT FRS can lead to fines, penalties, and possibly an investigation by HMRC.
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