What is a Flat Rate VAT?
The Flat Rate Scheme (FRS) is a simplified method of accounting for Value Added Tax (VAT) in the United Kingdom. It is designed to make the VAT accounting process easier for small businesses by simplifying the way VAT is calculated and reducing the amount of paperwork involved.
Under the FRS, a business calculates its VAT liability as a fixed percentage of its turnover including VAT. The percentage varies depending on the type of business and the industry. This fixed percentage includes VAT, so the business does not need to separately account for VAT on each transaction.
FRS calculation example
Let’s say a business has a turnover of £100,000 and the FRS percentage for their industry is 12.5%. Instead of calculating their VAT liability as 20% of their total sales (£20,000), they would simply multiply their turnover including VAT by the FRS percentage (£120,000 x 12.5% = £15,000). This means their VAT liability for the period would be £15,000.
One of the key advantages of the FRS is that it simplifies the record-keeping requirements for VAT, as businesses only need to keep a record of their total sales and the FRS percentage that applies to their industry. Additionally, businesses can usually make a profit from using the FRS, as the fixed percentage includes an allowance for VAT on expenses, which the business gets to keep.
The flat rate scheme is not suitable for ALL businesses
Businesses that make a lot of zero-rated or exempt sales may not benefit from the FRS, as they will not be able to reclaim VAT on their purchases. Additionally, businesses that have high levels of input VAT (VAT paid on purchases) may find that the FRS does not provide them with a significant benefit.
It is important for businesses to carefully consider whether the FRS is right for them, and to seek professional advice if they are unsure.