The VAT Flat Rate Scheme (FRS) provides a simpler way for small businesses to manage VAT. It allows businesses to pay VAT as a fixed percentage of their turnover. This turnover includes VAT.
Under standard VAT accounting, you calculate the difference between:
- VAT charged on sales
- VAT paid on purchases
However, the VAT Flat Rate Scheme removes this calculation.
Instead:
- You charge VAT to customers at the standard rate
- You apply a fixed percentage to your VAT-inclusive turnover
- You pay that amount to HMRC
As a result, you keep the difference between what you collect and what you pay.
How the VAT Flat Rate Scheme Works
The scheme applies a flat rate percentage to your total turnover, including VAT.
If you invoice a customer £1,000 plus VAT (£200 at 20%), your total invoice equals £1,200. Your flat rate equals 11%.
You now pay 11% of £1,200 which equals £132. You then keep the remaining £68. Over time, this difference can improve your cash flow.
The scheme also includes several features that make it more attractive:
- Fixed VAT percentage based on your industry
- Reduced bookkeeping and admin requirements
- 1% discount in your first year of VAT registration
- No VAT reclaim on most purchases
- VAT reclaim allowed on capital assets over £2,000
Flat Rate Percentages by Industry
HMRC sets flat rate percentages based on business sectors. These rates reflect typical cost structures.
| Business Type | VAT Flat Rate (%) |
|---|---|
| Accounting or bookkeeping | 14.5 |
| Advertising | 11 |
| Agricultural services | 11 |
| Architect, civil and structural engineer or surveyor | 14.5 |
| Boarding or care of animals | 12 |
| Computer and IT consultancy or data processing | 14.5 |
| Computer repair services | 10.5 |
| Entertainment or journalism | 12.5 |
| Estate agent or property management services | 12 |
| Film, radio, television or video production | 13 |
| Financial services | 13.5 |
| Forestry or fishing | 10.5 |
| Hairdressing or other beauty treatment services | 13 |
| Hiring or renting goods | 9.5 |
| Investigation or security | 12 |
| Lawyer or legal services | 14.5 |
| Management consultancy | 14 |
| Mining or quarrying | 10 |
| Photography | 11 |
| Post offices | 5 |
| Repairing vehicles | 8.5 |
| Secretarial services | 13 |
| Travel agency | 10.5 |
| Veterinary medicine | 11 |
| Wholesaling food | 7.5 |
Read the full list with more information on GOV.UK
If your business has multiple activities, you must use the rate for your main source of income.
Limited Cost Businesses
Some businesses fall under the “limited cost business” rules.
You qualify if either:
- Your spending on goods equals less than 2% of your turnover
- Your spending on goods equals less than £1,000 per year
In this case, you must use a flat rate of 16.5% regardless of your industry. This rule often affects service-based businesses.
How to Join the Flat Rate Scheme
You can join the VAT Flat Rate Scheme if you meet the following criteria:
- You run a VAT-registered business or you apply for VAT registration
- You expect your VAT taxable turnover to be £150,000 or less (excluding VAT)
VAT taxable turnover includes all sales that are not VAT-exempt. You must then apply to HMRC to join the scheme.
If you are not VAT-registered, you must register for VAT and join the scheme at the same time.
If you are already VAT-registered, you can apply online through your VAT account or by post using the correct form.
After you apply, HMRC will confirm your start date.
When You Must Leave
You must leave the VAT Flat Rate Scheme if:
- Your turnover exceeds £230,000 (including VAT)
- You expect to exceed the threshold shortly
- You no longer meet the eligibility criteria
You can also leave voluntarily at any time. However, you must wait 12 months before you can rejoin.
Who Cannot Join
HMRC restricts access to the scheme in certain situations.
You cannot join if:
- You left the scheme within the last 12 months
- You committed a VAT offence within the last 12 months
- You joined a VAT group within the last 24 months
- Your business is closely linked to another business
- You use certain VAT schemes (such as margin schemes)
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This article is for general informational purposes only and does not constitute legal or financial advice. While we aim to keep our content up to date and accurate, UK tax laws and regulations are subject to change. Please speak to an accountant or tax professional for advice tailored to your individual circumstances. Pi Accountancy accepts no responsibility for any issues arising from reliance on the information provided.