Contractor's guide to the Flat Rate VAT Scheme

There are certain perks you can enjoy as a contractor. One of these is the Flat Rate VAT Scheme, which is an alternative way for limited companies to work out how much VAT to pay to HMRC.

What is the Flat Rate VAT Scheme?

The Flat Rate VAT Scheme is an incentive provided by the government to help simplify taxes. This means you can reclaim VAT on purchases that you have been charged on from HMRC.

Using the standard VAT accounting method means that every quarter you will be required to fill in a VAT return form. However, since some contractors are eligible to join the Flat Rate VAT Scheme, you charge a standard rate of 20% on your invoices but pay HMRC a lower rate.

This amount can vary depending on your profession. The flat rates are set by HMRC and vary depending on industry sector, from 4% to 14.5%. You can view our full category list below.

What do the changes the Flat Rate VAT Scheme mean?

In April 2017, a new entity was declared, known as the limited cost trader. If a contractor is defined under this status, the VAT bill would instead be 16.5%. 

For more information about the changes in 2017, you can consult our guide.

What is a limited cost trader?

Limited cost traders are defined as one whose gross expenditure on relevant goods is either:

  • Less than 2% of their VAT inclusive turnover or
  • Greater than 2% of their VAT inclusive turnover but less than £1,000 per year

The figure should not include the cost of the following items:

  • Food and drink for the business or its staff
  • Capital expenditure
  • Vehicles and fuel 

Important notes about the Flat Rate VAT Scheme

  1. If you estimate that your annual turnover excluding VAT will exceed £150,000 in your first year, you shouldn't join the scheme.
  2. If your annual turnover exceeds £230,000 of VAT inclusive revenue in subsequent years, you must stop using the scheme
  3. Companies on the Flat Rate Scheme are unable to claim back any VAT on purchased goods and expenses for their business. However, you can reclaim VAT on capital asset purchases over £2,000, for example, a PC.
    Providing all the capital purchases are on the same receipt such as a PC, printer, and scanner, you can claim the VAT back on these items. You cannot, however, buy a PC one month for £1,500 then a printer the next month for £300 and a scanner the month after for £200 and add them together - they must all be on the same receipt. 

Like standard VAT, the Flat Rate Scheme still requires you to complete a quarterly VAT return form (online only). You will need to charge the standard VAT rate, currently 20% of your invoices, rather than accounting for the VAT on every payment, when you do your quarterly report, you will only pay a single flat rate percentage on your turnover of each quarter.

As the VAT percentage you pay is considerably lower than that of the standard VAT rate (see below table for a full list of the standard rates depending on your profession) you can keep the difference as your profit.

What are the advantages of using the Flat Rate Scheme?

  • The ability to earn money from VAT: you can earn thousands of pounds extra each year simply out of VAT (the government does this as the FRS is simple for them to manage and you are in effect acting as a tax collector).
  • A reduced amount of paperwork to handle as you are not submitting any of your input costs to HMRC, all you need to do is keep the receipts from your purchases.
  • If you are a new business, using the Flat Rate Scheme in your first year, you receive a further 1% decrease on the overall percentage tax you pay each quarter.

What are the disadvantages of using the Flat Rate VAT scheme?

  • If you are buying lots of stock or have high VAT chargeable expenses, you will miss out on reclaiming VAT

Flat Rate Scheme percentage rates 

Category of business Appropriate percentage
Accountancy or book-keeping 14.5
Advertising 11
Agricultural services 11
Any other activity not listed elsewhere 12
Architect, civil and structural engineer or surveyor 14.5
Boarding or care of animals 12
Business services that are not listed elsewhere 12
Catering services including restaurants and takeaways 12.5
Computer and IT consultancy or data processing 14.5
Computer repair services 10.5
Dealing in waste or scrap 10.5
Entertainment or journalism 12.5
Estate agency or property management services 12
Farming or agriculture that is not listed elsewhere 6.5
Film, radio, television or video production 13
Financial services 13.5
Forestry or fishing 10.5
General building or construction services 9.5
Hairdressing or other beauty treatment services 13
Hiring or renting goods 9.5
Hotel or accommodation 10.5
Investigation or security 12
Labour-only building or construction services 14.5
Laundry or dry-cleaning services 12
Lawyer or legal services 14.5
Library, archive, museum or other cultural activity 9.5
Management consultancy 14
Manufacturing fabricated metal products 10.5
Manufacturing food 9
Manufacturing that is not listed elsewhere 9.5
Manufacturing yarn, textiles or clothing 9
Membership organisation 8
Mining or quarrying 10
Packaging 9
Photography 11
Post offices 5
Printing 8.5
Publishing 11
Pubs 6.5
Real estate activity not listed elsewhere 14
Repairing personal or household goods 10
Repairing vehicles 8.5
Retailing food, confectionary, tobacco, newspapers or children's clothing 4
Retailing pharmaceuticals, medical goods, cosmetics or toiletries 8
Retailing that is not listed elsewhere 7.5
Retailing vehicles or fuel 6.5
Secretarial services 13
Social work 11
Sport or recreation 8.5
Transport or storage, including couriers, freight, removals, and taxis 10
Travel agency 10.5
Veterinary medicine 11
Wholesaling agricultural products 8
Wholesaling food 7.5
Wholesaling that is not listed elsewhere 8.5

Support from SJD Accountancy

If you have any further questions about the Flat Rate VAT Scheme and how this could affect you please do not hesitate to contact us on 01442 330254 or email newbusiness@sjdaccountancy.com.