Flat Rate Scheme - Features and Benefits

The flat rate VAT scheme is an incentive provided by the government to help simplify taxes.  You charge VAT on your invoices at 20% (the current VAT rate) but on the flat rate scheme you only pay a percentage of turnover back to HM Revenue and Customs, rather than paying VAT on the difference between sales and purchases.  Your FRS rate will depend on your profession and for your first year being on the FRS you will receive a 1% discount. The FRS is therefore the chosen scheme for most Contractors, Freelancers, Consultants. The scheme also benefits those businesses that have very few VAT chargeable purchases and expenses i.e. don’t buy much stock.











Advantages of using the Flat Rate Scheme

  • Decreased amount of paperwork, you are not required to submit any of your input costs to HMRC you just simply need to keep your receipts from your purchases.
  • If you are a new business, using the flat rate scheme in your first year, you receive a further 1% decrease on the overall percentage tax you pay each quarter.
  • The ability to earn money from being in the FRS, you can potentially earn extra cash each year simply from the difference in the VAT you charge and the amount you pay to HMRC. Like standard VAT, the flat rate scheme still requires you to complete a quarterly VAT return form online. You will still need to charge the standard VAT rate, currently 20%, to your invoices, however, rather than accounting for the VAT on every payment, when you do your quarterly report you will only pay a single flat rate percentage on your turnover of each quarter.

Disadvantages of using the Flat Rate Scheme

  • If your annual turnover exceeds £230,000 of VAT inclusive revenue in subsequent years you must come off the scheme or if you estimate that your annual turnover excluding VAT will exceed £150,000 in your first year, you shouldn't join the scheme.
  • Work done for EU businesses is outside the scope of UK VAT and is therefore excluded from the Flat Rate Scheme calculations.
  • If you are buying lots of stock or have high VAT chargeable expenses you will miss out on reclaiming the VAT. You can however reclaim VAT on capital asset purchases over £2,000, for example a PC. Providing all the capital purchases are on the same receipt such as a PC, printer and scanner you can claim the VAT back on these items. You cannot however buy a PC one month for £1,500 then a printer the next month for £300 and a scanner the month after for £200 and add them together, they must all be on the same receipt. 


Working example:

As the VAT percentage you pay to HMRC should be considerably lower than that of the standard VAT rate, check HMRC for the table for a full list of the standard rates depending on your profession (Link to HMRC), you then keep the difference as your profit. See example below based on a Limited Company specialising in IT:

Net amount you invoice your client


VAT charged on top to your client (20%)


Gross Amount  


Flat rate VAT 13.5% (this includes a first year discount of 1%)


VAT to be paid to HMRC - 13.5% of £6,000


VAT received from client  


Profit for you i.e. what you get to keep   



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