VAT flat rate scheme (FRS)

The amount of VAT a business pays or claims back from HMRC is usually the difference between the VAT charged by you to your customers and the VAT you pay on your own purchases.

With the Flat Rate Scheme (FRS), you pay a fixed rate of VAT to HMRC and you keep the difference between what you charge your customers and pay to HMRC. You cannot reclaim the VAT on your purchases - except for certain capital assets over £2,000.

To join the scheme your VAT turnover must be £150,000 or less (excluding VAT), and you must apply to HMRC.

Talk to an accountant or tax adviser if you want advice on whether the Flat Rate Scheme is right for you.

Find out more about the scheme.

How does it work

Under the Flat Rate Scheme (FRS) for VAT, you agree a fixed rate with HMRC and keep the difference.

Your eligibility and rate is determined by your turnover and business sector. For example, if you had an FRS rate of 11% and made sales (VAT Inclusive at 20%) of £21,600 in a quarter. You would pay HMRC £2,376 and keep the difference of £1,224.

The FRS calculation is made off the VAT inclusive (gross) figure.

Because you are partially reclaiming VAT on your sales, you are unable to reclaim VAT on purchases.

Capital Assets

A purchase of a capital asset worth £2,000 or more is eligible for the VAT to be reclaimed. IRIS KashFlow can work this out for you.

Set up a new purchase code making sure the type is set to Fixed Asset. Use this code when recording the purchase.

Remember the total value of the fixed assets on the purchase must be equal or greater than £2,000. You can have a purchase with multiple lines of fixed, assets, and multiple payments, and as long as the total of the fixed assets on that single purchase is £2,000 or greater, it will be included.

A fixed asset cannot be categorised as a service. If you are also dealing with purchases from EC suppliers you will not be able to clear the option to Treat purchases of this code from suppliers in other EC states as a product on my VAT return.

Purchases from Europe and reverse charge

Purchases from VAT registered business in Europe are outside the scope of FRS and will be included on your VAT return.

If you purchase services from outside the UK (including Europe) these can be eligible for reverse charge where the VAT due on the service purchase is both declared and claimed together, effectively cancelling out the VAT due.

IRIS KashFlow will calculate this for you if you have marked the purchase code as a service.