What is the Flat Rate VAT Scheme
While being affiliate with HM Revenue and Customs through the VAT flat rate scheme (FRS), a business has to pay a fixed percentage of their annual turnover (rather than paying the total VAT they collected minus the total VAT they paid, which is the Standard VAT calculation method)
The businesses with a yearly turnover of less than £150,000 per annum are eligible to be registered with HM Revenue and Customs through the Flat Rate Scheme. Also, if a business is already registered through the flat rate VAT scheme but exceeds £230,000 in annual turnover, then it will no longer be eligible for the scheme.
After registering with the scheme, the business pays the VAT to HM Revenue and Customs (HMRC) every 3 months. This saves the hecticness of hiring extra employees for accountancy and making sure that no receipt is accidentally misplaced.
Who can use the Flat Rate Scheme?
Joining the Flat Rate Scheme is straightforward for many small businesses, but there are some conditions to meet. To qualify, a business must already be VAT-registered and expect its VAT-taxable turnover for the next 12 months to be £150,000 or less, not including VAT. It also must not have left the scheme in the previous 12 months or been involved in any VAT offences, such as tax evasion, during that period.
In addition, the business cannot be part of a VAT group or use certain other VAT schemes, such as the Margin Scheme or Capital Goods Scheme. Finally, the business must not be closely linked with another company in a way that could artificially reduce its turnover to stay under the entry limit.
How much will a business pay under the Flat Rate Scheme?
It is very easy to calculate; just suppose a business has a yearly turnover of £108,000 and the VAT rate is 10%. Just multiply the percentage by the yearly turnover:
Step 1: Write the original amount: £108,000.
Step 2: Convert 10% into a decimal.
10% = 10 ÷ 100 = 0.10
Step 3: Multiply the amount by the decimal.
£108,000 × 0.10 = £10,800
Final Answer:
10% of £108,000 = £10,800
However, you can also do all of this calculation simply and accurately with our free VAT calculator for the UK!
Another requirement of this scheme is not to save all the receipts of sales, even though they aren’t required to be used in the calculation.
Also, if you are within your first year of VAT registration, you reduce your flat rate by 1%. For example, if your trade rate is 11%, you only pay 10% in the first year.
How much do ‘limited cost’ businesses pay?
Since April 2017, a special rule applies to “limited cost businesses”. A business falls into this category if the cost of its goods (known as “relevant goods”) is less than 2% of its VAT-inclusive turnover or less than £1,000 per year.
If classified as a limited cost business, the flat rate is set at 16.5% regardless of business sector. This rule prevents service-based businesses with very low goods costs from gaining an unfair advantage under the scheme.
Not all purchases count as relevant goods. Excluded items include:
- Vehicles, fuel, and related costs.
- Capital expenditure, such as large equipment purchases.
- Food and drink for staff.
- Services (such as accountancy, legal advice, or rent).
What do other business types pay?
| Business Type | Flat Rate (%) | Explanation |
|---|---|---|
| Accountants and Bookkeepers | 14.5% | Used by firms that handle financial records, tax returns, or general bookkeeping work. |
| Advertising and Marketing Services | 11% | Applies to businesses offering advertising, promotions, and marketing consultancy. |
| Architects and Engineers | 14.5% | For those designing buildings, structures, or offering technical engineering and surveying services. |
| Bakers and Food Retailers | 4% | For shops selling baked goods, sweets, newspapers, tobacco, or children’s clothing. |
| General Building and Construction (materials 10% or more) | 9.5% | For builders and contractors who supply materials that make up at least 10% of their turnover. |
| Construction (labour only, materials under 10%) | 14.5% | For builders who mainly supply labour rather than materials. |
| Cafés, Restaurants, and Takeaways | 12.5% | Used by catering services or food businesses selling meals to the public. |
| IT Consultants and Computer Services | 14.5% | For technology and computer professionals providing advice, software, or data services. |
| Hairdressers and Beauty Salons | 13% | For personal care services such as haircuts, styling, and beauty treatments. |
| Hotels and Accommodation | 10.5% | For hotels, guesthouses, or any business providing short-term accommodation. |
| Lawyers and Legal Services | 14.5% | For solicitors, barristers, and other professionals offering legal advice or services. |
| Estate Agents and Property Managers | 12% | For those involved in selling, renting, or managing properties. |
| Vehicle Repair and Maintenance | 8.5% | For garages and mechanics repairing or servicing motor vehicles. |
| Retailers of Food, Tobacco, Newspapers, or Children’s Clothes | 4% | For small shops selling daily goods or essentials. |
| Transport, Couriers, and Delivery Services | 10% | For businesses offering deliveries, removals, freight, or taxi services. |
| Other Businesses (not listed elsewhere) | 12% | For any business activity not clearly falling under another category. |
However, keep in mind:
- The flat rate percentages are worked out on your total sales including VAT, not just the net value of your turnover.
- During your first 12 months of VAT registration, you can knock 1 percentage point off your flat rate.
- If HMRC classifies you as a limited cost business, you do not use the sector rate — instead, you must apply a flat rate of 16.5%.
- When your business does more than one type of activity, you should choose the category that most closely reflects where the majority of your income comes from.
How to apply for the Flat Rate Scheme
If you are not yet VAT-registered, you can apply for VAT registration and the Flat Rate Scheme at the same time. If you are already VAT-registered, you can join by applying through your VAT online account or by completing and submitting the VAT600FRS form to HMRC.
Once accepted, HMRC will confirm the date from which you should start using the scheme. You must also keep proper records of your flat rate calculations alongside your normal VAT records.