What is the VAT Flat Rate Scheme?
The VAT Flat Rate Scheme (FRS) is a simplified method of calculating VAT for small businesses. Instead of paying HMRC the difference between your output VAT (charged to customers) and your input VAT (paid on purchases), you pay a fixed percentage of your total VAT-inclusive turnover.
This simplification reduces bookkeeping time and, in some cases, results in a financial benefit.
How the Standard VAT Scheme Works (for Comparison)
Under the standard VAT scheme:
- You charge customers 20% VAT on your services
- You reclaim VAT paid on business purchases (materials, equipment, software)
- You pay HMRC: output VAT collected − input VAT reclaimed
Example (standard scheme):
- Invoiced: £10,000 + £2,000 VAT = £12,000 received
- Input VAT on materials (£1,000 of materials): £200
- Pay HMRC: £2,000 − £200 = £1,800
How the Flat Rate Scheme Works
Under FRS:
- You still charge customers 20% VAT as normal
- You pay HMRC a fixed percentage of your VAT-inclusive turnover (typically 14.5% for general construction services)
- You keep the difference
Example (FRS for general construction):
- Invoiced: £10,000 + £2,000 VAT = £12,000 received
- FRS payment to HMRC: £12,000 × 14.5% = £1,740
- Kept: £2,000 − £1,740 = £260 profit
Flat Rate Percentages for Construction Trades
HMRC sets FRS percentages by trade. For construction-related businesses:
| Business Type | FRS Rate |
|---|---|
| Building or construction services (general) | 9.5% |
| Electrical or plumbing services | 14.5% |
| Painting or decorating | 12% |
| Computer repair services | 10.5% |
| Consulting or professional services | 14% |
New businesses get a 1% discount in their first year of VAT registration.
Always check the current rates at gov.uk/vat-flat-rate-scheme as they can change.
Is the Flat Rate Scheme Worth It?
The FRS is most beneficial for businesses with low material costs and high labour margins. It is less beneficial (or even a cost) for businesses that spend a lot on materials (since you cannot reclaim input VAT separately under FRS).
Rules of thumb:
- FRS works well if: labour is the majority of your costs, your material purchases are under 2% of your turnover
- FRS may not work well if: you spend heavily on materials, equipment, or subcontractors with VAT
Break-even calculation: FRS saves money if: (standard rate − FRS rate) × turnover > input VAT you would reclaim
For most sole trader tradespeople with low material spend, FRS often saves a small amount and significantly reduces paperwork.
The Limited Cost Business Rule
From April 2017, HMRC introduced a 16.5% "limited cost" rate for businesses that spend less than 2% of their VAT-inclusive turnover on goods (or less than £1,000 per year on goods). This was introduced specifically to target businesses using FRS primarily as a tax saving mechanism.
If you spend very little on goods (e.g., a pure labour business), you may be classified as a limited cost business and pay 16.5% on all turnover — which would likely be more expensive than the standard scheme.
Check whether you meet the limited cost business definition before applying for FRS.
FRS and CIS: A Complex Interaction
If you work under CIS, the interaction with FRS requires careful attention.
Under CIS, contractors deduct from your net invoice (before VAT). Under FRS, your VAT liability is based on total VAT-inclusive turnover.
If the Domestic Reverse Charge applies to your work, you do not charge VAT at all — meaning FRS provides no benefit for DRC supplies, since there is no VAT to account for. HMRC confirmed that FRS cannot be applied to supplies subject to the Domestic Reverse Charge.
How to Join the Flat Rate Scheme
You can apply to join FRS if your VAT-taxable turnover (excluding VAT) is less than £150,000 per year.
Apply online through your Government Gateway account or by post using form VAT600FRS. HMRC will confirm your acceptance and the rate that applies to your business.
When to Leave the FRS
You must leave FRS if your turnover (including VAT) exceeds £230,000 in the past 12 months, or if you expect it to in the next 30 days.
You may also choose to leave voluntarily if the standard scheme would be more beneficial (e.g., if you start buying significant amounts of materials).
Practical Advice
Before joining the FRS, calculate your expected benefit for the year:
- Estimate your annual VAT-inclusive turnover
- Multiply by your FRS rate to find your FRS VAT payment
- Estimate the input VAT you would reclaim under the standard scheme
- Compare: if FRS payment is lower, it saves money
Talk to your accountant before deciding — the calculation depends heavily on your specific business mix.
FlashBill and VAT Schemes
FlashBill supports standard VAT accounting. If you are on the Flat Rate Scheme, your invoices still show VAT at 20% to your customers — only your internal accounting calculation changes. Speak to your accountant about how to set up your records correctly.