The Flat Rate Scheme (FRS) is available to VAT registered businesses with a taxable turnover excluding VAT of below £150,000.
Instead of adding up the VAT on all your sales then deducting all the VAT on your purchases, you simply pay a flat percentage of your total gross income. This does away with the need to ask for VAT receipts for small items of expenditure. You also don’t need to worry whether the things you buy are standard rated, zero rated or exempt.
Note that the flat rate percentage is chargeable on your gross income. This means not only does it apply to your sales invoices inclusive of VAT, but it also applies to other business income such as interest received. Whilst these other items are likely to be relatively small, it is important to get these correct to avoid accusations of negligence by HMRC.
Benefits of the flat rate scheme
Simplicity – you no longer need to ask for VAT receipts for tiny items of expenditure, and don’t need to worry whether your purchases are standard rated, zero rated, or exempt.
Time Saving – most businesses typically have a few sales invoices, but many more purchase invoices…you don’t need to worry about the purchases.
Profitable (this is virtually never true anymore for contractors/freelancers since the introduction of “limited cost trader” rules) – if you make negligible standard rated purchases, you can end up making a profit from VAT. However, with 16.5% FRS rate for limited cost traders you’ll virtually always find the output VAT pocketed on sales will be dwarfed by input VAT you can’t reclaim.
Still Reclaim on Big Items – if you buy capital assets worth over £2,000 including VAT (can be several items provided purchased at the same time) you can still reclaim that VAT.
Potential disadvantages of the flat rate scheme
High Standard Rate Purchases – if you typically spend a lot on standard rated costs (eg you buy equipment to resell to clients), you will not be able to reclaim this VAT.
Zero Rated/Exempt Sales – if you make either zero rated or exempt sales, you will still have to pay over VAT to HMRC, even if not charged to the customer.
The flat rate scheme percentages
Below is HMRC’s table of flat rate scheme percentages. Note the rate payable varies with the headline rate (which was 17.5% for ages, then went to 15% briefly, and is now 20%). As many of these categories are virtually never used, we have marked the more common ones bold for your convenience. Also be aware that for limited cost traders (virtually all freelancers/contractors) you’ll need to use the 16.5% rate regardless of which category you’d otherwise fit into.
| Business Category | Post 4 Jan 2011 |
|---|---|
| Accountancy or bookkeeping | 14.5 |
| Advertising | 11 |
| Agricultural services | 11 |
| Any other activity not listed elsewhere | 12 |
| Architect, civil and structural engineer or surveyor | 14.5 |
| Boarding or care of animals | 12 |
| Business services that are not listed elsewhere | 12 |
| Catering services including restaurants and takeaways | 12.5 |
| Computer and IT consultancy or data processing | 14.5 |
| Computer repair services | 10.5 |
| Dealing in waste or scrap | 10.5 |
| Entertainment or journalism | 12.5 |
| Estate agency or property management services | 12 |
| Farming or agriculture that is not listed elsewhere | 6 |
| Film, radio, television or video production | 13 |
| Financial services | 13.5 |
| Forestry or fishing | 10.5 |
| General building or construction services* | 9.5 |
| Hairdressing or other beauty treatment services | 13 |
| Hiring or renting goods | 9.5 |
| Hotel or accommodation | 10.5 |
| Investigation or security | 12 |
| Labour-only building or construction services* | 14.5 |
| Laundry or dry-cleaning services | 12 |
| Lawyer or legal services | 14.5 |
| Library, archive, museum or other cultural activity | 9.5 |
| Management consultancy | 14 |
| Manufacturing that is not listed elsewhere | 10.5 |
| Manufacturing fabricated metal products | 9 |
| Manufacturing food | 9.5 |
| Manufacturing yarn, textiles or clothing | 9 |
| Membership organisation | 8 |
| Mining or quarrying | 10 |
| Packaging | 9 |
| Photography | 11 |
| Post offices | 5 |
| Printing | 8.5 |
| Publishing | 11 |
| Pubs | 6.5 |
| Real estate activity not listed elsewhere | 14 |
| Repairing personal or household goods | 10 |
| Repairing vehicles | 8.5 |
| Retailing food/tobacco/newspapers/kids clothes | 4 |
| Retailing drugs/cosmetics/toiletries | 8 |
| Retailing that is not listed elsewhere | 7.5 |
| Retailing vehicles or fuel | 6.5 |
| Secretarial services | 13 |
| Social work | 11 |
| Sport or recreation | 8.5 |
| Transport & storage – eg couriers/freight/removals/taxis | 10 |
| Travel agency | 10.5 |
| Veterinary medicine | 11 |
| Wholesaling agricultural products | 8 |
| Wholesaling food | 7.5 |
| Wholesaling that is not listed elsewhere | 8.5 |
*”Labour-only building or construction services” means building or construction services where the value of materials supplied is less than 10 per cent of relevant turnover from such services; any other building or construction services are “general building or construction services”
Typically therefore prior to 1 April 2017, the FRS suited small simple businesses with minimal expenditure, where the main thing “sold” is someone’s time. Contractors are a prime example where it was often beneficial to join the FRS. However, it’s not always a good idea, and there are many misconceptions about the FRS where people think it’s better than it actually is. In particular, the introduction of “limited cost traders” rules at 16.5% mean FRS is very rarely profitable for freelancers/contractors.
