Flat Rate VAT pitfalls…….

Table of Contents

The Flat Rate VAT Scheme (FRS) is a scheme that allows businesses with a turnover of under £150,000 to pay VAT on a fixed percentage of their gross turnover rather than the amount of VAT received less the amount paid out. This is supposed to reduce beaurocracy as the calculation of the VAT return is simplified. For people with few VAT’able exopenses such as contractors it is also usually beneficial to be in the scheme as often less VAT is due.

Seems great! But there are a few pitfalls that must be avoided…………………


  • No Backdating: The scheme entry can not be backdated. So if someone realises that it would have been beneficial to be in the scheme earlier then that is tough! The potential saving will only commence on joining the scheme.
  • Paying VAT on Zero Rated and Exempt Income: The VAT due is calculated on the total turnover even if no VAT was collected on sales. The percentages listed by HMRC for businesses here https://www.gov.uk/vat-flat-rate-scheme/how-much-you-pay attempt to take this in to account. So for example a food shop that would usually have a lot of zero rated sales has a very low percentage in the list. A calculation should be made before joining about whther it will be beneficial.
  • Choosing the wrong category: The list of business categories is vague. Recent tribunal cases have confirmed that HMRC will not retrospecively penalise people who choose a “reasonable” category.
  • Claiming Input Tax on Capital Goods: If a capital item like a van is purchsed and the total cost is more than £2,000 including VAT then the VAT can be claimed. This has to be goods and not services though even if the services like construction costs would be treated as capital for income tax.

So as you can see for a scheme that is all about simplification there is a lot of complexity!!!! If you would like advice on whether your business could benefit fromthe Flat Rate VAT scheme please give us a call.

John McLaughlin Chartered Accountant Scotland

John McLaughlin

Sutherland Black are plain talking accountants based in Scotland. We’ll support your business growth and goals. Talk to John today for friendly yet expert accounting advice.

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