Glossary · UK
What is VAT Flat Rate Scheme?
A simplified VAT scheme for small businesses turning over under GBP 150,000 that pay HMRC a fixed percentage of gross turnover instead of tracking input and output VAT.
Full Definition
The VAT Flat Rate Scheme (FRS) is a HMRC-approved simplification for small businesses with a VAT-exclusive annual turnover of GBP 150,000 or less. Instead of calculating the difference between output VAT (charged on sales) and input VAT (paid on purchases), the business pays a single flat rate percentage of gross (VAT-inclusive) turnover directly to HMRC. The business still charges customers 20% VAT on invoices, but remits only the flat rate percentage to HMRC, keeping the difference. The flat rate percentage varies by trade sector: for example, IT consultants and computer and IT repair services pay 14.5%; general retailers 7.5%; accountants 14.5%; hairdressers 13%; and some low-cost traders face a 16.5% rate (the 'limited cost trader' rate introduced in April 2017 to prevent abuse). A business is a limited cost trader if its VAT-inclusive expenditure on goods is either less than 2% of its gross turnover or less than GBP 1,000 per year -- for most pure service businesses this means the 16.5% rate applies. The scheme is financially beneficial when the flat rate percentage is lower than the business's actual effective input VAT recovery rate. On joining the FRS, a 1% discount applies in the first year of VAT registration. You cannot reclaim input VAT under FRS except on individual capital expenditure items over GBP 2,000 (inclusive of VAT). You must leave the FRS if turnover exceeds GBP 230,000 in the previous 12 months.
How VAT Flat Rate Scheme is calculated
VAT payable = Gross turnover (VAT-inclusive) x flat rate percentage- Gross turnover
- All VAT-inclusive sales (including VAT charged to customers).
- flat rate percentage
- Sector-specific rate set by HMRC, ranging from 4% to 16.5%.
Worked example: An IT consultant with GBP 10,000 net invoices charges GBP 2,000 VAT (total GBP 12,000). At 14.5% FRS rate: pays HMRC GBP 1,740 and keeps GBP 260 as a flat rate benefit.