Is the Flat Rate Scheme suitable for me?

Is the Flat Rate Scheme suitable for me?

Wednesday, 03 January 2018

For many small businesses the Flat Rate Scheme (FRS) can simplify VAT reporting procedures. It should help a small business without a bookkeeper to spend less time preparing VAT returns and more time focusing on their business. However, although the scheme is seen as a simplification, the process of deciding whether the scheme is suitable is often far from simple.

In principal the scheme may appear too good to be true. On standard rated supplies the taxpayer invoices customers 20% VAT but only pays a smaller percentage (between 4% and 16.5%) to HM Revenue & Customs (HMRC). For many traders it is as simple as that and despite the inability to recover input tax and HMRC’s recent introduction of the ‘low cost trader’ 16.5% super rate, a reduction in overall VAT liability is an unintended bonus for many users of the scheme. For others, however, there are a vast amount of potential pitfalls.

Avoid the traps

There are a number of traps which a business thinking of using the scheme must seek to avoid. It would be difficult to create an exhaustive list but the hazards include:

  • Making zero/reduced rated and exempt supplies – the flat rate percentage is applied to all income. A particular issue when making supplies of land/rent and of motor vehicles etc. where no input tax credit may have been available.
  • I have seen a number of traders over the years use the 1% reduction available in the first year of registration incorrectly – a business with an annual turnover of £150,000 could be hit with an additional £1,500 liability.
  • Failing to monitor the difference between the liability under the scheme compared to normal accounting – and potentially losing out!
  • A business with multiple income streams ignoring the level of turnover derived from each – the rate used is based on the predominant supply, so there is a risk that the incorrect one could be used.
  • Misunderstanding the rules regarding input tax recovery on assets costing over £2,000 and those which apply upon their eventual sale.

Other areas which may incur penalties

There are many other areas where a poorly advised taxpayer could find himself on the wrong end of a sanction, including:

  • Errors resulting from failing to understand the differences in preparing FRS returns;
  • Wrongly accounting for the interaction of the scheme with other VAT regimes such as cash accounting; and
  • Failing to correctly monitor the relatively low turnover level for compulsory withdrawal from the scheme of £230,000 (VAT incl.).

What should I do next?

HMRC have recently confirmed there will be no further major changes to the scheme in the near future. When used effectively, the FRS has its advantages, however, I recommend getting advice from a specialist before making an application. It’s notoriously difficult to obtain backdated withdrawal from the scheme.

If you think your business could benefit, please contact me on 0330 024 0888 or email

Daniel May

VAT Assistant Manager


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