Under the FRS, you charge your customers the normal 20% VAT rate. Instead of calculating the exact difference between output and input VAT, you pay HMRC a fixed percentage of your VAT-inclusive (gross) turnover. The percentage depends on your trade sector. The difference between the VAT you collect and the amount you pay HMRC is yours to keep.
The FRS is generally most beneficial for businesses with low input VAT (service businesses with few purchases). Businesses that buy lots of goods or materials often do better under the standard scheme.
Frequently asked questions
Under the Flat Rate Scheme you pay HMRC a fixed percentage of your VAT-inclusive turnover rather than calculating the difference between output and input VAT. The percentage depends on your trade sector and is set by HMRC. You still charge customers 20% VAT on your invoices but pay a lower percentage to HMRC, keeping the difference as a benefit.
You can join the FRS if your VAT-taxable turnover (excluding VAT) is £150,000 or less. You must leave when your total business income (including VAT) exceeds £230,000. New VAT registrants receive a 1% discount on their sector rate for the first year of VAT registration.
HMRC introduced the limited cost trader category for businesses that spend less than 2% of their VAT-inclusive turnover, or less than £1,000 per year, on goods (not services). Limited cost traders must use a flat rate of 16.5%, which largely eliminates the financial benefit of the FRS for service-based businesses with few goods purchases.
Generally no. Under the FRS you cannot reclaim input VAT on your purchases as you would under the standard scheme. The exception is capital expenditure of £2,000 or more (including VAT) on a single asset. For these purchases you can apply to reclaim the input VAT outside of the FRS calculation.
You must leave if your total business income exceeds £230,000 in any 12-month period. You may also choose to leave voluntarily if the scheme is no longer beneficial, for example because your input VAT has increased significantly. You can rejoin after 12 months if you are still eligible.