Glossary · UK
What is Flat Rate Scheme (VAT)?
A simplified VAT scheme where you pay HMRC a fixed sector percentage of gross turnover instead of tracking input VAT.
Full Definition
The VAT Flat Rate Scheme (FRS) is open to VAT-registered businesses expecting taxable turnover up to £150,000 (excluding VAT) in the next year. Instead of reclaiming input VAT on purchases, you pay HMRC a fixed percentage of your gross VAT-inclusive turnover, with the rate set by trade sector (for example 14.5% for IT consultancy or 12% for many service businesses). You still charge customers the normal 20% VAT, so the difference between VAT charged and the flat rate paid can be a small profit — or a loss for businesses with significant purchases. «Limited cost traders», whose spending on goods is below 2% of turnover (or below £1,000 a year), must use the higher 16.5% rate, which usually removes any advantage and catches many labour-only contractors. New registrants get a 1% discount in their first year.