The Flat Rate Scheme (FRS) offers simplified VAT accounting for businesses that meet specific eligibility criteria. The simplicity of FRS makes it attractive to smaller businesses, particularly if your business has little recoverable VAT expenses.
This guide walks you through the details of how businesses can join, remain in, or leave the FRS, and explains the practical points to consider along the way.
Psst! What to know exactly how to operate the flat rate scheme all the way to submitting VAT? Read this guide.
Psst! Psst! If your business is spending less than 2% of VAT-inclusive turnover or under £1,000 a year on goods you can qualify for being a limited cost trader. Read all about that here.
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▪ Businesses can join the Flat Rate Scheme (FRS) if their VAT-exclusive turnover is below £150,000 and they meet several criteria, such as not being associated with other businesses or penalisd for VAT-related offences.
▪ Applications can be made online, by email, or by post using form VAT600FRS. Once accepted, the business can start using the FRS.
▪ If your total turnover exceeds £230,000 (VAT inclusive), you must leave the scheme. There are also exclusions for businesses that use certain VAT schemes or make capital goods adjustments.
▪ Businesses may leave voluntarily at any time or must leave if they no longer meet eligibility requirements. Leaving the scheme at the end of a VAT period is administratively simpler.
▪ Operating under FRS means that special rules apply to the completion of VAT returns, specifically for boxes 1, 4, 6, and 7 (see step 10)
▪ n.b. Stay Sharp, Stay Savvy and Keep Winning.
Flat Rate Scheme: Eligibility, Joining, and Leaving
1- Eligibility to Join the FRS
Before joining the FRS, a business must ensure it meets various conditions:
1- Level of Turnover: Businesses can join the FRS if their expected VAT-exclusive turnover for the next 12 months is below £150,000.
This includes supplies of standard, reduced, and zero-rated goods and services but excludes capital assets and services subject to reverse charges.
▪ HMRC requires that businesses estimate their future turnover using reasonable forecasting methods such as previous trading periods, turnover of former business owners, or business plans. As long as businesses can demonstrate that their estimate was reasonable, they won’t be penalised if the actual turnover is higher than expected.
2- Offences and Penalties: A business cannot join the FRS if it has been convicted of a VAT offence, received a compound penalty offer, or been penalised for dishonesty within the last 12 months.
3- Group / Divisional Registration and Associated Persons: Businesses in VAT groups, divisions, or associated with other persons may not be eligible. Associated persons are entities closely linked financially, economically, or organisationally.
4- Other VAT Schemes: The FRS cannot be combined with some VAT schemes like the cash accounting scheme, retail schemes, or margin schemes for second-hand goods. However, it can be used with the annual accounting scheme.
5- Other Exclusions: Businesses that have left the FRS in the last 12 months, tour operators, and those required to make capital goods adjustments are ineligible to join.
2- How to Join the FRS
Once the eligibility criteria are met, businesses can apply to join the FRS in the following ways:
▪ By submitting form VAT600FRS online, by email, or by post.
▪ During the initial VAT registration process online.
▪ By calling the VAT helpline for assistance.
When submitting an application, businesses need to provide specific information such as their VAT registration number, main business activity, flat rate percentage, and their desired start date. It’s generally recommended to apply online or via email for a clear audit trail.
3- Retrospective Applications
HMRC may consider retrospective applications for businesses that were eligible for the FRS during a previous period, provided they meet the eligibility criteria. However, retrospective use is often denied if the business has already calculated VAT for that period using a different scheme.
Applications should be made as soon as possible to avoid complications.
4- Remaining in the FRS
Staying in the FRS requires businesses to meet ongoing eligibility requirements:
1- Turnover Threshold: Businesses must leave the scheme if their total VAT-inclusive turnover exceeds £230,000 at the anniversary of their start date. If a business’s turnover exceeds this threshold but is expected to drop below £191,500 in the next year, it can apply to HMRC for permission to remain in the scheme.
2- Group/Divisional Registration and Associations: A business must leave if it becomes part of a VAT group, is associated with another business, or adopts a divisional registration.
3- Use of Other VAT Schemes: Businesses cannot remain in the FRS if they start using the second-hand margin scheme, auctioneer’s margin scheme, or make capital goods adjustments.
5- Leaving the FRS
Businesses can leave the FRS voluntarily at any time, typically at the end of a VAT period for simplicity. Compulsory withdrawal occurs if the business no longer meets the eligibility criteria, such as exceeding the £230,000 turnover threshold or becoming ineligible due to association with other businesses or VAT schemes.
▪ Voluntary Withdrawal: Businesses must notify HMRC in writing, and HMRC will confirm the date the business leaves the scheme.
▪ Compulsory Withdrawal: If a business is forced to leave, it must notify HMRC within 30 days. Leaving the FRS midway through a VAT period requires two calculations: one for the period covered by the FRS and another using standard VAT rules.
Conclusion
Here are some practical tips for businesses considering the FRS:
▪ Ensure you meet the eligibility conditions for both joining and staying in the scheme. The criteria for joining and remaining can differ, particularly regarding turnover.
▪ If applying to join the FRS, doing so online is the easiest method and make sure you retain a clear audit trail.
▪ Monitor your eligibility regularly. If your turnover exceeds £230,000, you must notify HMRC and exit the scheme.
▪ Voluntary exit from the scheme is often simpler when done at the end of a VAT period.
▪ Be aware of potential tax adjustments when leaving the FRS, particularly if your business holds significant stock or capital assets.
By weighing the pros and cons and staying up to date with the requirements, businesses can determine whether the Flat Rate Scheme remains a suitable option as they grow.
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