Standard VAT vs The Flat Rate Scheme (FRS): Which is better for your business
If your business has a turnover under £150,000, HMRC lets you choose between the Standard VAT Scheme and the Flat Rate Scheme (FRS) to make VAT reporting easier.
Under the Standard VAT Scheme, businesses must account for VAT paid and received and report these to HMRC. Typically, VAT is charged at 20% on sales, and deducted from business expenses incurred in running the business if they qualify; the difference is paid to HMRC. This approach suits businesses with substantial VATable costs. However, service-based businesses with minimal expenses have little input VAT to reclaim.
With the VAT Flat Rate Scheme, you still charge 20% VAT on your invoices, but you pay HMRC a lower, fixed percentage that depends on your industry. For some, this can be advantageous as it allows you to keep the difference between what you collect and what you pay HMRC, which can boost your profits. However, being on the Flat rate scheme means you cannot reclaim VAT on everyday purchases.
In the transport and logistics industry, the FRS VAT rate is currently 10%, making it a good alternative to the standard scheme. But if you are classed as a ‘limited cost trader’ by HMRC, meaning you spend less than 2% of your turnover on goods, HMRC will apply a 16.5% flat rate instead.
Choosing a specific accounting scheme only makes sense once you grasp the baseline fundamentals of the tax itself. If you are new to business registration, step back and read our essential primer: What is VAT? & When Do I Need to Register?
Or get in touch with our team for a personalised VAT consultation to help you choose the best scheme for your business.
