Setting up
your business

The flat-rate VAT scheme (FRVS) makes small business lives easier (there’s more information on the HMRC site).

Rather than recording the VAT on every transaction you make (EG goods and services you pay for and offer), you just pay a set percentage of your turnover. This saves you loads of paperwork.

The percentages vary by industry - and if you’re particularly efficient (ie you spend less than usual on raw materials), you could end up making a profit on VAT! (And vice versa of course…).

The downside is that you can’t reclaim VAT you’ve paid - but this is already allowed for in the FRVS percentage that applies to you.

FRVS example

Imagine you charged customers £10,000 plus £1,500 VAT. And you paid £4,000 plus £600 VAT for materials.

Normal VAT accounting

You’d need to pay the government £1,500-£600=£900 in VAT. There would be a lot of record taking in keeping a note of the relevant VAT on every transaction.

Flat rate scheme

Under the FRVS, you pay a set percentage of your turnover including VAT. Let’s say your FRVS rate was 7.5%. You’d pay 7.5% x (£10,000 plus £1,500) = £862.50.

In this example, you’re paying slightly less VAT (although in general, you shouldn’t expect to pay less) - but you have to keep far fewer records. You just need the figure for your turnover.