Flat Rate VAT Scheme

The Flat Rate VAT scheme was introduced in 2002 and is available to all small businesses or sole proprietorships. The FRS differs from standard VAT accounting as you pay a percentage of turnover rather than paying VAT on the difference between sales and purchases.

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General Information

The flat rate scheme for small businesses was set up to reduce the administrative burden imposed when operating VAT. Under the scheme a set percentage is applied to the turnover of a business as a one-off calculation instead of having to identify and record VAT on each sale/purchase made.

Who Can Join?

The scheme is optional and open to businesses whose annual taxable turnover does not exceed £150,000.

A business may not operate the scheme until it has received notification that its application has been accepted and HMRC has confirmed the date of commencement.

How the Scheme Operates

VAT due is calculated by applying a pre-determined flat rate percentage to business VAT Inclusive turnover during a VAT period.

Percentage rates are determined according to the trade sector that the business operates in. The table below provides a summary of current percentages. In addition to the figures quoted, there is a further 1% reduction off the normal rates for businesses in their first year of VAT registration.

Although VAT is paid at the relevant flat rate percentage, a business is still required to prepare invoices to VAT registered customers showing the normal rate of VAT. This allows customers to reclaim input VAT at the appropriate rate.

Treatment of Capital Assets

The purchase of capital assets costing more than £2,000 (including VAT) may be dealt with outside the scheme. Businesses can claim input VAT on such items on their VAT return in the conventional way.

Note - where the input VAT is reclaimed, businesses must account for VAT on the subsequent sale of the asset at the normal rate instead of the flat rate.

Records to Keep

Under the scheme, businesses must keep a record of their flat rate calculation showing:

  • flat rate turnover
  • the flat rate percentage used
  • the tax calculated as due

Important Update

In April 2017, a new 16.5% trade classification was introduced for Limited Cost Traders. This is likely to have a significant (negative) impact on most freelance contractors who operate via their own limited companies.

Please click here for more information.

How Champion Help

Champion will advise whether the flat rate scheme will be beneficial to your business and will help you to operate it.

APPENDIX: Table of Sectors and Rates

Trade Sector % Trade Sector % Trade Sector %
Accountancy or book-keeping 14.5 Hiring or renting goods 9.5 Publishing 11
Advertising 11 Hotel or accommodation 10.5 Pubs 6.5
Agricultural services 11 Investigation or security 12 Real estate activity not listed elsewhere 14
Any other activity not listed elsewhere 12 Labour-only building or construction services* 14.5 Repairing personal or household goods 10
Architect, civil and structural engineer or surveyor 14.5 Laundry or dry-cleaning services 12 Repairing vehicles 8.5
Boarding or care of animals 12 Lawyer or legal services 14.5 Retailing food, confectionary, tobacco, newspapers or children's clothing 4
Business services that are not listed elsewhere 12 Library, archive, museum or other cultural activity 9.5 Retailing pharmaceuticals, medical goods, cosmetics or toiletries 8
Catering services including restaurants and takeaways 12.5 Management consultancy 14 Retailing that is not listed elsewhere 7.5
Computer and IT consultancy or data processing 14.5 Manufacturing that is not listed elsewhere 9.5 Retailing vehicles or fuel 6.5
Computer repair services 10.5 Manufacturing fabricated metal products 10.5 Secretarial services 13
Dealing in waste or scrap 10.5 Manufacturing food 9 Social work 11
Entertainment or journalism 12.5 >Manufacturing yarn, textiles or clothing 9 Sport or recreation 8.5
Estate agency or property management services 12 Membership organisation 8 Transport or storage, including couriers, freight, removals and taxis 10
Farming or agriculture that is not listed elsewhere 6.5 Mining or quarrying 10 Travel agency 10.5
Film, radio, television or video production 13 Packaging 9 Veterinary medicine 11
Financial services 13.5 Photography 11 Wholesaling agricultural products 8
Forestry or fishing 10.5 Post offices 5 Wholesaling food 7.5
General building or construction services* 9.5 Printing 8.5 Wholesaling that is not listed elsewhere 8.5

"Labour-only building or construction services" means building or construction services where the value of materials supplied is less than 10 per cent of relevant turnover from such services; any other building or construction services are "general building or construction services".

This material is published for the information of clients. It provides only an overview of the regulations in force at the date of publication, and no action should be taken without consulting the detailed legislation or seeking professional advice. Therefore no responsibility for loss occasioned by any person acting or refraining from action as a result of the material can be accepted by the authors or the firm.

Contact Us

For more information and advice simply request a call back or contact one of our advisors on 0161 703 2549 or by email info@championcontractors.co.uk who will be more than happy to help you.