VAT Flat Rate Scheme

Also called Flat rate scheme, FRS

A simplified way of working out VAT: you pay a fixed percentage of your gross turnover and generally do not reclaim input VAT.

What it means

Under the Flat Rate Scheme you still charge your customers the normal rate of VAT, but you pay HMRC a fixed percentage of your VAT-inclusive turnover instead of the difference between output and input tax. The percentage depends on your trade sector.

In exchange, you cannot usually reclaim VAT on purchases, except on capital assets over a set value.

Why it matters

It is much less admin, and for some businesses it is cheaper. For businesses with significant purchases it is more expensive, sometimes considerably.

The "limited cost business" rules introduced in 2017 mean businesses spending very little on goods pay a high fixed rate, which removed most of the benefit for consultants and similar service businesses.

What it looks like in practice

The decision is arithmetic: work out a year on the normal scheme and a year on the flat rate using your actual figures, and pick the cheaper. Any accountant will do this in an hour.

There is a turnover ceiling for joining and a higher one for leaving.

What to watch out for

The limited cost business test, which catches more businesses than owners expect.

A change in your purchasing pattern. The scheme that was right when you started may not be right after you take on premises or start buying stock — it is a decision to revisit, not to make once.

Where to get proper advice

GOV.UK lists the sector percentages. An accountant should run the comparison before you join and again if your business changes shape.