VAT Flat Rate Scheme: Pros, Cons and Eligibility

Introduction

The VAT Flat Rate Scheme (FRS) is designed to simplify VAT reporting for small businesses in the UK. While it offers advantages like easier calculations and less paperwork, it’s not right for everyone. Here’s what you need to know.

What is the Flat Rate Scheme?

Under FRS, you pay a fixed percentage of your gross turnover as VAT instead of tracking input and output VAT separately.

Who Can Join the Scheme?

• VAT-registered businesses with taxable turnover under £150,000 (excluding VAT)
• Must not have left the scheme in the past 12 months

Flat Rate Percentages by Sector

Rates vary by industry, e.g.:

• IT Contractors: 14.5%
• Accountants: 14.5%
• Retail: 7.5%
• Catering: 12.5%

Pros of the Flat Rate Scheme

• Simpler VAT calculations
• Less paperwork
• Predictable payments
• Potential to save money (in some cases)

Cons of the Flat Rate Scheme

• You can’t reclaim VAT on most purchases
• May cost more if you have significant input VAT
• Limited benefit for businesses with low expenses

Limited Cost Trader Rules

If you’re classed as a “limited cost trader,” a higher flat rate of 16.5% applies, reducing the benefits of the scheme.

How HPL Accountancy Can Help

We offer:

• FRS eligibility assessment
• Comparison with standard VAT scheme
• Registration and quarterly VAT filings
• Ongoing reviews to ensure it’s still suitable

Conclusion

The Flat Rate Scheme can be a useful tool for the right business. Contact HPL Accountancy to see if it’s the right fit for you.