What is VAT FRS? An Overview

The VAT Flat Rate Scheme (FRS) is used to calculate a VAT payable to HMRC based on the gross turnover in a period. This scheme lets you-

- Pay a fixed rate of the VAT to HMRC (Her Majesty’s Revenue & Customs).
- Keep the difference between what you charge the customers and what you pay to HMRC.

However, it is to be noted that you cannot reclaim the VAT on your purchases except for certain assets over £2,000.

It was introduced in 2002 to assist the businesses in calculating their VAT returns easily and quickly. Rather than calculating the VAT due on individual purchases, the scheme focuses on completing a VAT return by calculating the VAT payable to HMRC as a fixed percentage of the gross turnover of the business. This reduces the amount of paperwork and calculations that need to be done.

Qualifying Criteria

Below is the list of certain criteria that decide whether or not your business qualifies for the FRS.

- The taxable turnover (excluding VAT) of your business must be not more than £150,000 per annum. Taxable turnover is the total value of supplies and/or sales made by the business that is liable to VAT (except the expected sale of capital assets).
- The business must not be using the capital goods scheme for certain capital items.
- The business must not be associated with another business or registered as a part of any VAT group in the past 2 years. Also, your business must not be found guilty of a VAT offense in the past year.
- The business must not be using the tour operators, the retail or the second-hand goods scheme.

How to Calculate?

Below are the steps that need to be followed to calculate the amount of VAT your business will be liable to under the VAT Flat Rate Scheme.

- All turnover, be it standard, zero-rated, reduced or even exempt, is included in the taxable supplies. This is known as the gross turnover and goes into box6 on the VAT return.

- The output VAT for the VAT return is, then, calculated by multiplying your VAT-inclusive turnover by a fixed percentage. This is determined by which industry your business operates in. 

- No VAT can be reclaimed on purchases but for any VAT on purchases before the business was registered for VAT or any VAT on a single capital asset that costs over £2000 (VAT inclusive), it can be reclaimed. This goes in Box 4 of your return and the net amount of the purchase goes in Box 7.

The calculation is, usually, lengthy and difficult. But the VAT calculator by Calconic makes it easier, simple, and convenient.

The VAT FRS is applied to the entire business income including rent, interest from business bank accounts, and any sales of assets in which VAT was not reclaimed. The scheme lets you pay VAT on the gross receipts of sales which you have not collected any VAT.

You can even de-register from this scheme before selling a high-value asset but you have to stay out of the scheme at least for a year.