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VAT Flat Rate Scheme Basics

A lot of people hear VAT, think 20% and stop there. However, there is an alternative way for small businesses to work out how much VAT they need to pay HMRC, and this is called the VAT flat rate scheme, its often shortened to VAT FRS. It is designed to help small businesses reduce their admin related to VAT returns.

Under the standard VAT rules the amount you pay HMRC each quarter is the difference between VAT you’ve reclaimed on supplier bills and the VAT you’ve charged to your clients.


Under the flat rate scheme, you still charge VAT to your customers as usual, but you only pay a percentage of your total sales to HMRC as VAT. This means you keep the difference between what you’ve charged your clients and what you pay HMRC.

You don’t reclaim VAT on purchases when using this scheme, unless you buy a capital asset that cost over £2,000 including VAT. On these purchases you can reclaim the VAT but must pay the standard VAT percentage when reselling.

The percentage of your total sales you pay HMRC depends on what type of business you are. There is a long list of categories which we can’t list here, but HMRC provide them all here  

All businesses receive a 1% discount in their first year of being a VAT registered business.


You calculate the VAT you must pay by multiplying the percentage applicable to your business by your VAT inclusive turnover.

You charge £1,500 for a job, and add 20% VAT bringing the total to £1,800

As a photographer your flat rate is 11%

You pay HMRC £1,800 * 11% which totals £198


There is a caveat to the VAT FRS, for what HMRC calls “limited cost businesses”. This means businesses that either:

·         Spend less than 2% of turnover on goods

·         Spend less than £1,000 if the spend on goods is more than 2% of turnover

For these limited cost businesses the flat rate amount is 16.5% which means for a lot of businesses it is more cost effective to follow the usual VAT rules. Its also important to note that the spend must be on goods, and not services. This means that stationary would be allowed, train tickets wouldn’t.


To join the flat rate VAT scheme your income excluding VAT must be under £150,000. If you have joined a flat rate scheme and your income reaches over £230,000 you must leave the scheme. You also can’t re-join the flat rate scheme within 12 months of leaving.

If you think joining a flat rate scheme might help you with your business administration get in contact and we can tell you if it would work for you!

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