What is the VAT flat rate scheme?
Definition of the VAT flat rate scheme
The VAT flat rate scheme is an alternative way for small businesses to work out how much VAT to pay to HMRC each quarter.
The scheme's name is often abbreviated to VAT FRS.
If you are not using the flat rate scheme, the amount you pay to HMRC each quarter will be the difference between the VAT you have charged to your customers and the VAT you can reclaim on your supplier bills.
When you are using the flat rate scheme, you still charge VAT to your customers in the normal way, but you pay a percentage of your total sales to HMRC as VAT. The percentage depends on what your business's trade is, unless you are a limited cost trader. You can't reclaim VAT when you're using the flat rate scheme, unless you buy a capital asset that cost over £2,000 including VAT - you can reclaim the VAT on that, but must pay standard VAT on that asset when you sell it on.
The VAT flat rate scheme is designed to save a small business time, rather than cash. That's why the percentages vary with trades, because some businesses would be able to reclaim more VAT than others, since they have to buy more.
VAT Flat Rate Scheme Calculator
Use our free VAT FRS calculator to find out if you would be better off on the VAT flat rate scheme.
Got questions? Ask Emily!
FreeAgent's Chief Accountant Emily Coltman is available to answer your questions in the comments.