VAT Flat Rate Scheme 2023

When using VFRS, it is mandatory for businesses to pay VAT on both their sales and purchases. Some companies have the ability to utilize the (VFRS) VAT Flat Rate Scheme, which is a simplified method of accounting for value-added tax.

Purpose of VAT Flat Rate Scheme 

Flat Rate Percentage: The tax authority designated a set flat rate percentage for each industry or trade group. This flat rate % accounts for the typical VAT liability of companies operating in that industry. For instance, a restaurant might charge a flat rate percentage of 12%, while a construction company might charge 9%.

By applying the Flat Rate percentage to its gross revenue, which includes VAT, a business employing the VFRS determines its liability. The company is not required to separately compute input and output tax (sale) or account for VAT on individual sales and purchases.

Simplified VAT returns

Companies using the VFRS submit streamlined returns by disclosing their gross revenue and the flat rate VAT due based on the relevant flat rate percentage. Compared to the traditional VAT accounting scheme, which necessitates input and output tax records, this streamlines the administrative process.

Limited Input Tax Recovery

Under the VFRS, businesses generally cannot reclaim VAT on their purchases, except for certain capital assets coasting more than a specified threshold. That differs from the standard VAT Scheme, where businesses can offset their input tax against their output tax.

Flat Rate Scheme Eligibility

Depending on the nation or tax jurisdiction, specific individuals may not meet the VAT Flat Rate Scheme requirements. However, the following general characteristics  should be taken into  account when establishing eligibility for the program:

• Turnover Threshold:

VAT Flat rates in various countries have some threshold for joining the scheme. Your VAT taxable turnover (excluding VAT) must generally be below a specific limit over the next 12 months to qualify. The VAT threshold that applies to your business.

• Business Activity:

The VAT Flat Rate Scheme is often sector-specific, meaning businesses may be eligible for a specific trade category or sector. The tax authority assigns each sector a Flat Rate percentage. Your business activities must fall within one of these sectors to participate in the scheme. The industries and corresponding flat rate percentages can differ between countries.

• Limited Cost Trader Rules: 

Some countries have introduced “limited cost trader” rules impacting eligibility. These rules target businesses with low costs on goods, such as those providing services, and may require them to apply a higher flat rate percentage.

Standard VAT Accounting Scheme

Under the Standard Accounting Scheme, businesses separately calculate VAT on their sales and purchases. They charge VAT at the standard rate (or applicable reduced rate) on their sales and claim input VAT (paid on purchases) as deductions.

VAT Reclaims:

Businesses can reclaim input VAT on eligible purchases, subject to specific rules and restrictions. This means they can recover the VAT they have paid to suppliers.

VAT Returns:

Businesses registered under the Standard VAT Accounting Scheme submit returns to the tax authority, reporting their output (charged on sales) and input (paid on purchases). The difference between the two amounts is either paid to or refunded by the tax authority.

Record-Keeping: 

To support their calculations and claims, businesses must maintain detailed records of their sales and purchases, including invoices, receipts, and other supporting documentation.

VAT Flat Rate Scheme

• Fixed VAT Rate: Under the Flat Rate Scheme, businesses pay a fixed VAT rate on their gross turnover, including inclusive sales. The flat rate is a simplified percentage the tax authority sets based on the business sector or trade category.

• More short Accounting: Businesses using the VFRS do not need to separate their sales and purchases for tax-finding purposes. They apply the flat rate percentage to their total turnover.
• Limited Reclaims: Unlike the Standard VAT Accounting Scheme, businesses under this Scheme generally cannot reclaim tax on their purchases, except for certain capital assets above a specific value.
• VAT Returns: The returns under the VFRS are more straightforward. Businesses only need to report their total sales (including VAT) and pay the tax at the flat rate percentage. They do not need to calculate input amounts or separate sales and purchase VAT amounts.
• Record-Keeping: While businesses still need to maintain records for their accounting and tax purposes, the VAT Flat Rate Scheme record-keeping requirements are generally less demanding than the Standard Accounting Scheme.

Pros

• Simplicity: The VAT Flat Rate Scheme is generally more straightforward than the Standard Accounting Scheme. Businesses only need to apply a fixed rate to their total turnover and pay VAT at that rate without separating sales and purchasing VAT amounts.

• Reduce Administration: The scheme reduces administrative burden as businesses do not need to find input tax and keep detailed purchase VAT records. It can save time and resources, especially for small businesses with limited accounting capabilities.
•  Potential for Higher Profit Margin: In some cases, businesses can benefit from the scheme financially. The difference between the VAT charged to customers and the lower flat rate paid to the tax authority can result in higher profit margins.

• First-Year Discount: New businesses joining the VFRS can receive an additional 1% discount on their Flat Rate in the first year of trading, providing a slight financial advantage.

• Easier VAT Return Filling: VAT returns under the scheme are typically easier to complete. Businesses only need to report total sales and pay VAT at a fixed rate, simplifying the return-filling process.

Cons

• Limited VAT Reclaims: Businesses generally cannot reclaim VAT on purchases, except for certain capital assets above a specific value. This means they cannot recover the tax they have paid to suppliers, resulting in potential additional costs.

• Higher Flat Rate for Limited Cost Businesses: Some businesses are subject to a higher flat rate if classified as “limited cost businesses.” it can reduce the financial benefit of the scheme for those businesses.

• Ineligible for Input VAT Claims: Businesses that rely heavily on VAT-reclaimable purchases may find the scheme less beneficial, as they cannot recover input tax on most purchases

How to register

Step 1 (Verify Your Eligibility): Make sure your company satisfies the VAT Flat Rate Scheme requirements. Being VAT-registered and anticipating a VAT-taxable turnover of £150,000 or less (minus VAT) throughout the following 12 months are requirements.

Step 2 (Gather Information): Assemble the information and paperwork needed for the registration process. It can include your company’s name, address, VAT registration number, information about your primary line of business, and the flat rate % you want to employ.

Step 3: Access the online registration form for the Flat Rate Scheme by visiting the HM Revenue and Customs (HMRC) website. Its form number is VAT600FRS.

Step 4 (Fill out the form): Fill out the VAT600FRS form with the necessary details. Your company’s name, address, phone number, and VAT registration number will all be shown in this section. It would help if you also chose the flat rate % you will employ and describe your primary line of business.

Step 5 (Submit the Form): Once you have filled in all the required information on the form, please review it carefully to ensure accuracy. Then, submit the form electronically through the online system.

Step 6: 

Await confirmation after submitting the form, you will receive confirmation from HMRC regarding your registration for the VAT Flat Rate Scheme. They will notify you of the effective date you can use the Scheme. If you requested a different date to start, HMRC will communicate whether it has been approved.

Also Read

VAT Calculator

History of VAT in the UK

VAT Margin Scheme

How to Register for VAT