flat rate vat

What is the Flat Rate VAT Scheme in the UK and Ireland?

VAT schemes are simplified procedures opted by governments to calculate and collect VAT from businesses. The nature of these VAT schemes depends upon the type of businesses, operating location, and the country's economic situation. Among different VAT schemes, the most popular one in the UK and Ireland is “Flat Rate VAT”. 

The VAT Flat Rate Scheme is a specified VAT policy applicable to small businesses with an annual turnover of less than £150,000. It is an elucidated accounting procedure that lets the business pay the same amount of VAT without undertaking a hefty route of lengthy paperwork. But like every VAT scheme, this one also has a few specifications and limitations.

Continue with this article if you want to learn further about what is Flat Rate VAT scheme and whether your business is eligible for it. The context shall apply to the VAT policies in both the UK and Ireland.

What is the VAT Rate Flat Scheme?

The VAT flat rate scheme has undergone several changes in the past. The last update was made on June 1, 2022, by HMRC.

According to this scheme, you calculate the tax by multiplying your VAT Flat Rate by your annual VAT-inclusive business turnover. As a Flat Rate Vat Return example, if your business’s annual turnover is £20,000 and the percentage of VAT flat rate is 10%, you will pay a tax of £2,000 to HMRC (10% of £20,000).

The VAT Flat Rate scheme is an oversimplified process. You don’t have to undergo a lengthy process of calculating input and output VAT. Instead, you pay a pre-finalized VAT rate on your turnover.

However, there are some terms and conditions that you must oblige if you want to access this scheme. Similarly, the government has established a few categories under this scheme to ensure that no one exploits the VAT policy and takes its illegal advantage.

The VAT Flat Rate scheme has similar obligations in the UK and Ireland. Since the UK and the Irish government both report to the HM Revenue and Customs (HMRC) department, they have an identical framework for VAT schemes.

What are the Eligibility Criteria for Flat Rate VAT in the UK and Ireland?

Before discussing different categories for the Flat Rate VAT scheme, let’s scrutinise whether your business is eligible for it in the UK and Ireland.

Eligibility Criteria in the UK and Ireland

  • VAT-Registered:

    The foremost thing you must ensure to apply for the flat rate scheme is that your business should be registered for VAT with HMRC. Only the VAT-registered business in the UK can apply for this policy. Same criteria is used to apply for the flat rate scheme in Ireland. Also Read, How to register for VAT

  • Flat Rate VAT Threshold:

    The Flat Rate VAT scheme is designated for small businesses with an annual turnover of only £150,000, excluding the VAT. Your business is only eligible for the scheme if your turnover meets this criteria. The same criteria is used in both the UK and Ireland. The turnover can be calculated in any reasonable method. Most of the time, it is based upon the past 12 months if you were registered for VAT for up to a year. You can apply for the scheme by phone or post. But if you are not VAT-registered, you should complete the VAT1 form first.

  • Flat Rate VAT Percentages:

    The VAT Flat Rate percentage varies depending upon the type of business, services, and economic conditions. In the UK, the percentage usually varies between 4% to 16.5%.In Ireland generally, they range between 4% to 16.5%, i.e., the same as in the UK. But businesses that are new to the scheme and are in their first year of VAT registration can enjoy a 1% reduction in the standard VAT flat rate.

  • VAT Recovery:

    The requirement for VAT recovery is the same in both the UK and Ireland. Unlike what most people think, you cannot reclaim the VAT on purchases less than £2000 (VAT-included) from HMRC. This clause in the scheme was included to simplify the accounting process, as it excludes the need to determine output and input VAT.

  • Leaving the Flat Rate VAT:

    Businesses can voluntarily exit the scheme at any point of the year. But if their turnover threshold exceeds £150,000, leaving the flat rate scheme becomes mandatory as they no longer qualify for it. However, while exiting the program, they must account for the remaining products and services subject to the scheme’s policy.

    Businesses must leave the scheme if their threshold in the past twelve months exceeds £230,000. But if HMRC is satisfied with an income below £191,000, you can continue the scheme. You can also voluntarily leave the flat rate scheme at any point.

  • Ineligibility Criteria:

    The criteria which makes you ineligible for Flat Rate scheme is same in both UK and Ireland. You cannot use the VAT Flat Rate scheme if you have once left the policy within the past twelve months. Similarly, your track record will also be scrutinised. If you have committed an offence such as VAT evasion, you will not be granted the scheme again. Moreover, a business having close financial ties with another organization is also ineligible for the VAT Flat Rate.

Also Read; What is Output and Input VAT? How Can You Calculate It?

What are the Categories in the Flat Rate VAT Scheme?

As mentioned earlier, the Flat Rate VAT percentages are calculated according to the business’s nature. Thus, to ease the division of businesses, HMRC has divided them into two categories. These categories simplify the calculation process and prevent businesses from exploiting the scheme’s benefits.

  • Limited-Cost Businesses

    This category was made by HMRC in 2017 after it noticed that many limited-cost businesses in the UK and Ireland are taking false advantage of the scheme. Now, it is essential to understand what a limited-cost business is.

    A business that spends a small amount of capital on goods comes under the limited-cost category, and its owner will be called a “limited-cost trader.” The limited-cost businesses in the UK and Ireland are charged a higher flat rate VAT of 16.5%.

    To qualify as a limited-cost trader, you must not spend more than 2% of your business’s turnover on purchasing goods. However, if you spend a maximum of £1000 on goods, even though it is higher than 2% of your business’s turnover, you will still have to pay flat rate VAT on a limited-cost basis.

    While calculating your business's purchases, you must exclude expenditures such as food items, vehicles and parts, and capital assets. Excluding these, all the other purchases will be qualified as “goods” for your business activities.

  • Flat Rate VAT for Other Businesses

    All the other businesses except for limited-cost ones are charged flat rate VAT depending upon the services or goods they provide. Therefore, in this category, the flat rate percentages vary for different businesses.

    Let’s first discuss the higher end, which goes up to 14.5% (still lower than limited-cost businesses). These businesses usually include IT and computer services, accountancy, engineers, consultants, architects, and bookkeepers.

    Whereas on the lower end, we have food retail companies, grocery stores, children’s clothing, tobacco, confectionery, and newspapers. These lower-end businesses are changed as meagre as 4% of the VAT flat rate.

How to Calculate Flat Rate VAT?

If you have a business in the UK or Ireland, you can calculate its flat rate VAT by observing the following method;

  • The first step is determining whether your business is eligible for the Flat Rate VAT scheme.
  • Next, check your business's category, as it will determine your flat rate percentages. If your business is cost-limited, you will be charged a 16.5% flat rate VAT. But it belongs to the higher-end of businesses, a 14.5% flat rate will apply. However, the lower-end companies will pay only 4% flat rate VAT. Besides, contacting HMRC or other legal authorities is suggested to confirm your exact flat rate VAT.
  • Now calculate the VAT-inclusive annual turnover for your business. You can do so by estimating the total value of your sales.
  • Multiply the turnover with the VAT percentage to determine your flat rate tax.
    VAT Flat Rate = Annual Turnover x Flat Rate VAT %

  • Report the estimated VAT to HMRC
  • Keep the records of the sales and calculations for record-keeping and audits

how to calculate flat rate vat

What is the Difference Between Flat Rate VAT vs Standard VAT?

Flat Rate VAT and Standard VAT are categories of the same subject, but they are still very different. Usually, the foremost difference between Standard and Flat Rate VAT is their implied percentages. The Standard VAT rate usually ranges between 4% and 23% in the UK and Ireland.

On the other hand, the Flat Rate VAT for both countries can be between 4% to 16.5%. The Flat Rate VAT scheme is specified for only small businesses. Whereas for standard VAT, all you must do is register with HMRC.

The Flat Rate scheme is much simpler, requiring less record-keeping. On the other hand, Standard VAT follows a conventional detailed procedure with lengthy bookkeeping. Yet, as expected, the Standard VAT provides more accuracy and is suitable for large businesses.

Moreover, you cannot reclaim VAT on the flat rate scheme unless your capital purchases exceed £2000. It is because the flat rate scheme already has a discounted VAT percentage. On the contrary, you can reclaim VAT on most of your business purchases with the Standard policy.

Final Verdict

VAT600FRS and VAT Retail schemes are meant to simplify the VAT process for small businesses. Smaller businesses can also save cash with Flat Rate VAT, as you pay less tax on this scheme than on the Standard VAT policy.

Thus, if you are also considering applying for this scheme, you should first register your business with HMRC. Then, you can apply for VAT600FRS after your past 12-month turnover is verified to be less than £150,000.


What is the box 6 VAT return flat rate scheme?

Box 6 on the VAT600FRS is used to enter the flat rate turnover (including the VAT), which should be less than £150,000

Who qualifies for Flat Rate VAT?

To apply for Flat Rate VAT, you must run a business on a small scale with an annual turnover of less than £150,000. Besides, you must not have left this scheme previously during the last twelve months, and your track record with HMRC should also be clear.

Rían Doyle

I'm a VAT professional with years of experience helping businesses with compliance and reporting. My goal is to simplify VAT calculation and provide valuable insights through my engaging writing style and clear explanations of complex concepts.