Flat Rate Scheme for VAT

The VAT Flat Rate Scheme (FRS) is designed to reduce the time that small companies, such as your limited company, spend on accounting for and calculating VAT. Registered users pay VAT as a fixed percentage of their VAT inclusive turnover, as opposed to calculating the difference between input VAT and output VAT on a quarterly basis.

One of the reasons why the calculation is so simple is that users of the FRS cannot reclaim VAT paid on purchases, excluding certain capital assets costing more than £2,000.

Your limited company will be eligible for the VAT FRS providing it is VAT registered and has an expected VAT taxable turnover of less than £150,000. Once registered, you can remain within the scheme for as long as your company income doesn’t surpass £230,000.

Should my limited company register for the VAT Flat Rate Scheme?

The FRS brings simplicity to a previously troublesome task but weighing up whether the scheme is right for your limited company is far from straightforward. 

The fixed percentages at which companies pay VAT are determined by the industry in which they operate, and can range from 4% to 14.5%, although, in April 2017, the Government introduced the concept of a ‘limited cost trader’. 

This is defined as a company which spends either less than 2% of annual turnover or less than £1,000 per year on goods. The significance is that limited cost traders pay VAT at the higher flat rate of 16.5%.

Our contractor accountants find that many limited companies fall into this bracket, and some wind up losing money in the FRS compared with paying standard VAT.

VAT Flat Rate Scheme – things to consider before joining

Your limited company may or may not benefit from registering for the VAT FRS. To help you determine the best option for you, here are some questions to ask yourself:

• In which industry do you operate and what would your flat rate percentage be?
• Do you spend a sufficient amount on business purchases to avoid the ‘limited cost trader’ tag?
• How much do you value simplicity?

For further information about the scheme, see our online guide . Alternatively, our specialist contractor accountants are on hand to help. We can assess your situation, draft up some calculations and help you determine whether you would benefit from the FRS.
 

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Hillier Hopkins is a trading name of Hillier Hopkins LLP, which is registered as a Limited Liability Partnership in England & Wales, No. OC303707. Registered Office: Radius House, 51 Clarendon Road, Watford, Herts WD17 1HP. Registered to carry on audit work in the UK and Ireland by the Institute of Chartered Accountants in England & Wales. A list of members of the LLP is available at the above address. HH and Hi logos are trade marks belonging to Hillier Hopkins LLP. © Hillier Hopkins LLP.