VAT is a tax on the UK’s supply of goods and services. It is charged at 20% on most goods and services. All VAT-registered businesses must charge VAT on their taxable supplies and pay it to HMRC. For small businesses, calculating and recording VAT can be time-consuming and complicated. The VAT Flat Rate Scheme was introduced by HMRC to simplify VAT calculations and reporting for small businesses. Here’s how it works and the benefits it offers:

What is the VAT Flat Rate Scheme?

The VAT Flat Rate Scheme allows small businesses to pay VAT as a flat percentage of their turnover rather than having to calculate and report VAT on each sale. Your taxable turnover must be below the VAT registration threshold of £85,000 per year to qualify. You can join the scheme if your business:

• Turnover is less than £150,000 per year
• Is not eligible for one of the other VAT schemes, e.g. retail scheme
• Is not VAT exempt

How Does the VAT Flat Rate Scheme Work?

When you join the scheme, HMRC will assign you a flat rate percentage based on your business sector. This is a reduced VAT rate of between 4% – 16.5% for most sectors. You must then apply this flat rate to your total VAT taxable turnover to arrive at the VAT you need to pay to HMRC.

For example, if your assigned flat rate is 10.5% and your VAT taxable turnover for the quarter is £30,000, your VAT payment would be:

£30,000 x 10.5% = £3,150

This is much simpler than calculating and recording VAT on each sale. You don’t need to record VAT separately or issue VAT invoices. Just record your gross turnover and sales and apply the flat rate.

Benefits of the VAT Flat Rate Scheme

The VAT Flat Rate Scheme offers several benefits for small businesses:

• Simplified VAT calculations – No complex VAT invoices or reporting
• Cash flow benefits – Payments are based on revenue, not output tax
• Lower compliance burden – Less time spent on admin
• Usually a lower VAT bill – The flat rates are reduced from standard 20%
• Can retain the difference between flat rate and 20% as an extra income

For example, if your rate is 10.5%, but the goods you sell have 20% VAT, you would keep the difference of 9.5% on sales. This can provide a welcome boost to small business margins.

Who Can Join the VAT Flat Rate Scheme?

To be eligible for the VAT Flat Rate Scheme, you must:

• Expect taxable turnover below £150,000 in the next year
• Do not use the second-hand margin scheme or any retail schemes
• Have a VAT-taxable activity
• Be able to keep digital records of sales and purchases

You can’t use the scheme if you use the capital goods scheme or have VAT debts. Directors can individually sign up if their business turnover qualifies.

How to Join the VAT Flat Rate Scheme

Joining the VAT Flat Rate Scheme is easy:

1. Check that your turnover is under £150,000 per year
2. Make sure you meet all the eligibility criteria
3. Choose which flat rate percentage will apply to your business sector
4. Complete form VAT600FRS and submit it to HMRC
5. Start applying the flat rate to your gross turnover for VAT reporting

You must leave the scheme if your turnover exceeds £230,000, and you’ll be liable for any additional VAT due. You can voluntarily leave the scheme with one month’s notice if it no longer suits your business. Using the VAT Flat Rate Scheme reduces administrative hassle and, in most cases, lowers the VAT bill for eligible small businesses. Checking your eligibility and joining is straightforward if the scheme is right for your business. With simplified VAT reporting, you can focus on running your business, not calculating your VAT liability.