Flat Rate Scheme for VAT

If your VAT taxable turnover is less than £150,000, you could simplify your VAT accounting by calculating your VAT payments as a percentage of your total VAT-inclusive turnover. Although you cannot reclaim VAT on purchases - it is taken into account in calculating the flat rate percentage - the Flat Rate Scheme can reduce the time that you need to spend on accounting for and working out your VAT. Even though you still need to show a VAT amount on each sales invoice, you don't need to record how much VAT you charge on every sale in your accounts. Nor do you need to record the VAT you pay on every purchase.

If you are newly VAT registered you can reduce your flat rate by 1% until the day before the first anniversary of your VAT registration.

On this page:

What is the Flat Rate Scheme for VAT?

Using standard VAT accounting, the VAT you pay to HM Revenue & Customs (HMRC) or claim back from them is the difference between the VAT you charge your customers and the VAT you pay on your purchases.

Using the Flat Rate Scheme you pay VAT as a fixed percentage of your VAT inclusive turnover. The actual percentage you use depends on your type of business.

See the sections in this guide relating to the changes in the flat rate percentages to ensure that you use the correct rate.

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Who can and can't join the Flat Rate Scheme?

Who can join the Flat Rate Scheme

You can join the Flat Rate Scheme for VAT and so pay VAT as a flat rate percentage of your turnover if:

  • your estimated VAT taxable turnover - excluding VAT - in the next year will be £150,000 or less. Your VAT taxable turnover is the total of everything that you sell during the year that is liable for VAT. It includes standard, reduced rate or zero rate sales or other supplies. It excludes the actual VAT that you charge, VAT exempt sales and sales of any capital assets.

Generally you don't reclaim any of the VAT that you pay on purchases, although you may be able to claim back the VAT on capital assets worth more than £2,000 - see the section in this guide on claiming back VAT on capital assets for the rules and restrictions.

Once you join the scheme you can stay in it until your total business income is more than £230,000.

VAT rates explained: standard, reduced, zero, exempt

Find out how to leave the scheme in VAT Notice 733

Who can't join the Flat Rate Scheme

You can't join the Flat Rate Scheme if:

  • you were in the scheme and left during the previous 12 months
  • you are, or have been within the previous 24 months
    • eligible to join an existing VAT group
    • registered for VAT as a division of a larger business
  • you use one of the margin schemes for second-hand goods, art, antiques and collectibles, the Tour Operators' Margin Scheme, or the Capital Goods Scheme
  • you have been convicted of a VAT offence or charged a penalty for VAT evasion in the last year
  • your business is closely associated with another business

Read more about associated businesses and the Flat Rate Scheme in VAT Notice 733

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The pros and cons of the Flat Rate Scheme

Benefits of using the Flat Rate Scheme

Using the Flat Rate Scheme can save you time and smooth your cash flow. It offers these benefits:

  • you don't have to record the VAT that you charge on every sale and purchase, as you do with standard VAT accounting. This can mean you spending less time on the books, and more time on your business. You do need to show VAT separately on your invoices, just as you do for normal VAT accounting
  • a first year discount. If you are in your first year of VAT registration you get a one per cent reduction in your flat rate percentage until the day before the first anniversary you became VAT registered
  • fewer rules to follow. You no longer have to work out what VAT on purchases you can and can't reclaim
  • peace of mind. With less chance of mistakes, you have fewer worries about getting your VAT right
  • certainty. You always know what percentage of your takings you will have to pay to HMRC

Potential disadvantages of using a Flat Rate Scheme

The flat rate percentages are calculated in a way that takes into account zero-rated and exempt sales. They also contain an allowance for the VAT you spend on your purchases. So the VAT Flat Rate Scheme might not be right for your business if:

  • you buy mostly standard-rated items, as you cannot generally reclaim any VAT on your purchases
  • you regularly receive a VAT repayment under standard VAT accounting
  • you make a lot of zero-rated or exempt sales

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Working out your flat rate percentage and the VAT you need to pay

Working out your flat rate percentage

There is a range of flat rate percentages that correspond to different business sectors. You must choose the sector that best describes your main business activity for the coming year. You must only use one percentage. So if you work in more than one business sector, you must use the one that represents the greater part of your turnover. You then apply that percentage to your total turnover.

Please note that new flat rate percentages apply from 4 January 2011. See the table in this guide for the current flat rate percentages.

Discount in your first year of VAT registration

There's a one per cent reduction in the flat rate percentages for your first year of VAT registration. So if you are in your first year of VAT registration, you can reduce the flat rate percentage for your sector by one, until the day before the first anniversary of your VAT registration. This discount applies even if the flat rate percentage for your sector changes during your first year of registration.

Working out how much VAT you need to pay using your flat rate percentage

You calculate your VAT payable to HMRC by applying your flat rate VAT percentage to your 'flat rate turnover'. If you are still in your first year of VAT registration, remember to reduce your flat rate percentage by one.

Your flat rate turnover is all the supplies your business makes including all:

  • VAT inclusive sales for standard rate, zero rate and reduced rate supplies
  • sales of exempt supplies, such as rent or lottery commission - you don't have to make any partial exemption calculations
  • sales of capital expenditure goods - unless you have previously reclaimed the VAT, in which case they must be accounted for at the standard rate and not the flat rate
  • sales to other EU countries
  • sales of second-hand goods - but if you sell a lot of these, you may be better off leaving the Flat Rate Scheme and using a margin scheme

Don't include:

  • services you've purchased from outside the UK that you've had to reverse charge
  • disbursements - costs you pass on to your clients that meet the necessary VAT conditions
  • private income, for example income from shares
  • bank interest received on a business account
  • the proceeds from the sale of goods you own but which have not been used in your business
  • any sales of gold that are covered by the VAT Act, Section 55 - see the link below
  • non-business income and any supplies outside the scope of UK VAT
  • sales of capital expenditure goods on which you have claimed back the VAT you paid

Find out more about disbursements and VAT

Read more about sales of gold in VAT Notice 701/21

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Flat Rate Scheme percentage rates from 4 January 2011

These rates will apply from 4 January 2011 until further notice. Previous rates can be found in the 2009 Pre-Budget Report. See link at the foot of this table.

Category of business

Appropriate percentage

Accountancy or book-keeping

14.5

Advertising

11

Agricultural services

11

Any other activity not listed elsewhere

12

Architect, civil and structural engineer or surveyor

14.5

Boarding or care of animals

12

Business services that are not listed elsewhere

12

Catering services including restaurants and takeaways

12.5

Computer and IT consultancy or data processing

14.5

Computer repair services

10.5

Dealing in waste or scrap

10.5

Entertainment or journalism

12.5

Estate agency or property management services

12

Farming or agriculture that is not listed elsewhere

6.5

Film, radio, television or video production

13

Financial services

13.5

Forestry or fishing

10.5

General building or construction services*

9.5

Hairdressing or other beauty treatment services

13

Hiring or renting goods

9.5

Hotel or accommodation

10.5

Investigation or security

12

Labour-only building or construction services*

14.5

Laundry or dry-cleaning services

12

Lawyer or legal services

14.5

Library, archive, museum or other cultural activity

9.5

Management consultancy

14

Manufacturing fabricated metal products

10.5

Manufacturing food

9

Manufacturing that is not listed elsewhere

9.5

Manufacturing yarn, textiles or clothing

9

Membership organisation

8

Mining or quarrying

10

Packaging

9

Photography

11

Post offices

5

Printing

8.5

Publishing

11

Pubs

6.5

Real estate activity not listed elsewhere

14

Repairing personal or household goods

10

Repairing vehicles

8.5

Retailing food, confectionary, tobacco, newspapers or children's clothing

4

Retailing pharmaceuticals, medical goods, cosmetics or toiletries

8

Retailing that is not listed elsewhere

7.5

Retailing vehicles or fuel

6.5

Secretarial services

13

Social work

11

Sport or recreation

8.5

Transport or storage, including couriers, freight, removals and taxis

10

Travel agency

10.5

Veterinary medicine

11

Wholesaling agricultural products

8

Wholesaling food

7.5

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% of relevant turnover from such services; any other building or construction services are 'general building or construction services'

Find earlier Flat Rate Scheme percentage rates in the Flat Rate Scheme Manual

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What to do if your flat rate percentage changes

If the Table of flat rates changes then you must use the new percentage for your sector from the date it comes into force. If the rate changes during a VAT accounting period, you will have to do the following calculations for that period:

  1. apply the old percentage rate to your flat rate turnover from the start of the period up to the day before the rate changes
  2. apply the new percentage rate to your flat rate turnover from the first day of the new rate to the end of the period
  3. add the two figures together to produce the total VAT you owe to HMRC for the period

Find out what to do if there is a change of flat rate - Notice 733

Cash-based turnover method

This method allows you to account for your VAT liability when you receive payment. It does not affect the time of supply (tax point). So if your flat rate percentage changes, you must apply the rate that was in place at the time of supply and not the rate that is in place when payment is received.

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Invoicing, record-keeping and VAT returns

Invoicing

Although you only have to pay HMRC a percentage of your turnover, you must still show VAT at the appropriate normal rate (standard, reduced or zero) on the invoices you issue.

Find out what VAT invoices must show

Record-keeping

Once you are using the scheme, you must keep a record in your VAT account of the flat rate calculation that you do for each VAT period showing:

  • the flat rate turnover that you used to calculate your flat rate VAT payment (or if the percentage changed during the period, the turnover figures used for each part of the period)
  • the flat rate percentage you used (or if the percentage changed during the period, the percentages used for each part of the period)
  • your VAT due

Completing your VAT Return

The Flat Rate Scheme does not have its own VAT Return, so you must complete a standard return in a different way.

Read more about how to complete your VAT Return for a Flat Rate Scheme

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Claiming back VAT on capital assets

If you use the Flat Rate Scheme, you can't normally claim back the VAT you spend on capital assets you buy for your business. This is already taken into account in the flat rate percentage for your type of business. However, you may be able to claim back the VAT on certain capital asset purchases with a VAT-inclusive price of £2,000 or more. You make these claims by putting the amount of VAT you were charged in Box 4 of your VAT Return.

These are the rules for claiming back VAT when you buy capital assets:

  • it must be a single purchase of capital goods with a VAT-inclusive price of £2,000 or more. That doesn't mean you are restricted to claiming back the VAT on a single item - for example, you could buy a pizza oven, fridge and dishwasher, as long as you buy them at the same time from the same supplier and the price is more than £2,000 including VAT
  • it must be a purchase of capital goods, not services. Capital goods are goods you can use in the business but are not used up by it - for example, a van, computer or bottling machine are capital goods, but not the fuel, printer ink or bottles that go in them. A van leased or hired to you is a continuous supply of services, but one bought on hire purchase is considered a supply of capital goods
  • you can't claim back VAT on goods that you intend to either resell, or incorporate into other goods to supply on to someone else
  • you can't claim back VAT on goods that you will let, lease or hire out - for example, a bouncy castle
  • you can't claim back VAT on goods that you intend to use up (consume) within a year
  • building materials and work are not capital goods. You can't claim back the VAT if you have building work done (even if it includes expenditure on materials), and you can't claim back the VAT if you buy building materials yourself for someone else to build with
  • as long as all the other conditions are met, you can claim back all the VAT even if the goods will have some private use. For example, if you buy a van but employees are allowed free use at weekends to move private belongings, you can still claim back all the VAT
  • there is an upper limit on claims for certain items. If you buy something that falls within the Capital Goods Scheme you must write and tell HMRC and leave the Flat Rate Scheme immediately. Goods that fall within the Capital Goods Scheme are computers or items of computer equipment with a VAT-exclusive price of £50,000 or more, or land and buildings, civil engineering works and refurbishments with a VAT-exclusive value of £250,000 or more

Find out more about the Capital Goods Scheme

Selling a capital asset

If you meet all the conditions and claim back the VAT on a capital asset, then when you have finished with the asset and sell it, you must charge VAT at the full standard rate - not at your flat rate percentage.

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Farmers, florists and barristers and the Flat Rate Scheme

If you're a farmer, there is a separate Agricultural Flat Rate Scheme, which is an alternative to registering for VAT. You don't charge VAT, but you can add - and keep - a flat rate addition of four per cent on sales that you make to VAT-registered customers. The flat rate addition isn't VAT, but compensates you for some of the VAT that you pay on your purchases.

Read more about the Agricultural Flat Rate Scheme in VAT notice 700/46

Barristers and advocates who use the Flat Rate Scheme and who share premises with others may need to use special accounting rules.

Find more about barristers and the Flat Rate Scheme in VAT Notice 700/44

Florists using the Flat Rate Scheme who are members of organisations such as Interflora, Teleflorist or Flowergram must use special methods to account for their sales and purchases.

See the special rules for florists and the Flat Rate Scheme in VAT Notice 733

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Joining and leaving the Flat Rate Scheme

How to join the Flat Rate Scheme

You can join the Flat Rate Scheme at the beginning of any VAT accounting period.

If you use HMRC's online services to apply for VAT registration, you can apply to join the Flat Rate Scheme at the same time.

Log in to HMRC Online Services to register for VAT

You can also download and complete an application form and then send it to HMRC by post. Alternatively, you can email HMRC the form to:

frsapplications.vrs@hmrc.gsi.gov.uk

Get form VAT 600FRS 'Flat Rate Scheme application'

Get form VAT 600 AA/FRS for joining the Annual Accounting Scheme and the Flat Rate Scheme at the same time

Find advice on completing your application form in VAT Notice 733

Find out about claiming back VAT on stock and assets on hand at the time of registration

How to leave the Flat Rate Scheme

You may leave the scheme at any time by telling HMRC - you will normally leave at the end of your next VAT accounting period, but you can leave the scheme at any time. HMRC will confirm the date you left the scheme in writing.

You must notify HMRC if there are significant changes to your business which may affect your eligibility to use the scheme.

You must leave the scheme if:

  • at any anniversary of your joining the scheme your previous year's VAT-inclusive turnover was more than £230,000
  • you think your turnover in the next 30 days alone will be more than £230,000
  • you start to use one of the other special schemes such as one of the margin schemes for second-hand goods, art, antiques and collectibles, the Tour Operators' Margin Scheme, or the Capital Goods Scheme
  • you become eligible to join an existing VAT group, or register for VAT as a division of a larger business

You may also be taken off the scheme by HMRC if they find that you have calculated your VAT incorrectly or that you have become ineligible but have not told them. If you leave the Flat Rate Scheme, you can't rejoin it for at least 12 months.

Find out about leaving the scheme in VAT Notice 733

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The Flat Rate Scheme and other VAT schemes

Annual Accounting Scheme

You can use the Flat Rate Scheme together with the Annual Accounting Scheme.

Using annual VAT accounting, you make nine monthly or three quarterly interim payments throughout the year. You only need to complete one VAT Return at the end of the year when you either make a balancing payment or receive a balancing refund.

Get information about the Annual Accounting Scheme

You can join the Flat Rate Scheme and the Annual Accounting Scheme at the same time using a single application form.

Get form VAT 600 AA/FRS for joining the Annual Accounting Scheme and the Flat Rate Scheme at the same time

Cash Accounting Scheme

You can't use the Flat Rate Scheme with the Cash Accounting Scheme. Instead, the Flat Rate Scheme has its own cash based method for calculating the turnover.

Read more about the cash based turnover method in VAT Notice 733

Retail schemes

You can't use the Flat Rate Scheme with the retail schemes, but if you are a retailer, the Flat Rate Scheme has its own retailer's method for calculating the turnover.

More about the retailer's turnover method in VAT Notice 733

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Other VAT accounting schemes

Annual Accounting Scheme

Using annual VAT accounting, you make nine monthly or three quarterly interim payments throughout the year. You only need to complete one VAT Return at the end of the year when you either make a balancing payment or receive a balancing refund.

Get information on the Annual Accounting Scheme

Cash Accounting Scheme

Unlike standard VAT accounting where VAT is due when you issue an invoice, using cash accounting you don't have to pay VAT until your customers pay you.

Read about the Cash Accounting Scheme

Retail schemes

If you are a retailer, there are several schemes where you can simplify your calculation of VAT by not having to account for VAT on each individual sale.

Find out about the retail schemes

Margin schemes for second-hand goods, art, antiques, collectibles

If you buy or sell second-hand goods, antiques, collectibles or art, you only need to account for VAT on the difference between the price you paid for an item and the price at which you sell it - your margin.

Get information about VAT margin schemes for second-hand goods

Tour Operator's Margin Scheme

The Tour Operator's Margin Scheme makes VAT accounting easier for tour operators that buy and sell travel, accommodation and certain other services internationally.

Read about the Tour Operators’ Margin Scheme in VAT Notice 709/5

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