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VAT – The Flat Rate Scheme

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 is 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.  Also with the introduction of “limited cost traders” rules at 16.5% it’s very rarely profitable anymore.

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