If you’re a small VAT-registered business, the VAT Flat Rate Scheme (FRS) can simplify your tax process and reduce admin. But is it saving or costing you money?
While the scheme makes VAT calculations easier, it could mean paying more tax than necessary—especially for businesses classed as limited cost traders.
So, is the Flat Rate Scheme worth it for you? Let’s take a closer look.
What is the VAT Flat Rate Scheme?
The Flat Rate Scheme (FRS) is designed to make VAT reporting simpler for small businesses.
Instead of calculating the difference between VAT charged on sales and VAT paid on purchases, businesses using the scheme:
- Charge standard VAT rates on sales (e.g. 20%)
- Pay a fixed percentage of their VAT-inclusive turnover to HMRC
- Keep the difference as their VAT profit margin
The flat rate percentage depends on your business sector—you can find the full list on Gov.uk: www.gov.uk/vat-flat-rate-scheme.
Who Can Use the Flat Rate Scheme?
You can join the scheme if:
✔️ You are VAT-registered
✔️ Your annual turnover (excluding VAT) is £150,000 or less
Once in the scheme, you can stay in as long as your turnover doesn’t exceed £230,000. However, HMRC may allow you to stay if turnover briefly rises above this but is expected to fall below £191,500 within 12 months.
Restrictions apply: You cannot join if you’re already using another VAT scheme or if you have left the scheme within the last 12 months.
How Does It Work?
Instead of calculating VAT on each purchase, you pay a fixed percentage of your VAT-inclusive turnover to HMRC each quarter.
Example: How the Flat Rate Scheme Works
Alison runs a cattery and has been using the Flat Rate Scheme for five years.
Her VAT-inclusive turnover for the quarter = £32,000
The flat rate percentage for her sector = 12%
VAT paid to HMRC = 12% of £32,000 = £3,840
Unlike traditional VAT accounting, she doesn’t need to track VAT on expenses separately—simplifying her bookkeeping.
Limited Cost Traders – A Major Pitfall
If your business is classed as a limited cost trader, the scheme may cost you more than it saves.
What is a Limited Cost Trader?
You’re a limited cost trader if:
- Your goods cost less than 2% of turnover, or
- Your goods cost less than £1,000 per year
Important: VAT on services (e.g. rent, software, contractors) does NOT count towards this calculation—only goods do!
How Does This Affect Your VAT?
Limited cost traders must pay VAT at a higher rate—16.5% of VAT-inclusive turnover.
This is equivalent to 19.8% of VAT-exclusive turnover, meaning you only keep a tiny VAT margin and may lose out financially compared to standard VAT accounting.
Is the Flat Rate Scheme Worth It?
The Flat Rate Scheme saves time, but it doesn’t always save money.
It may not be worthwhile if:
- You are a limited cost trader
- You claim a lot of VAT on purchases
- You incur high VAT on services
It may be beneficial if:
- You don’t reclaim much VAT on expenses
- You want a simple VAT process
- You fit into a sector with a favourable flat rate percentage
How to Decide? Do the Maths!
Before joining the scheme, compare:
The VAT you’d pay under the Flat Rate Scheme
The VAT you’d owe under traditional VAT accounting
If the Flat Rate Scheme results in higher VAT payments, it’s not worth it. If it simplifies your VAT without costing you extra, it could be a good option.
Need Help Choosing the Right VAT Scheme?
VAT is complicated, and the wrong decision could cost your business money.
Jon and the team can help you assess whether the Flat Rate Scheme is right for you—or if you’d be better off sticking with traditional VAT accounting.
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Any questions?
If you’d like a meeting or a video call to discuss this, please get in touch with your favourite Liverpool accountant
- You can ring us on 0151 380 8080
- You can email us at gr****@*********************co.uk