Flat rate VAT: Thresholds and Registration
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If you run a limited company as a contractor or a small business owner, VAT becomes more of a priority as your turnover grows. You might have heard about the flat rate VAT scheme but may be unsure how it works or whether it’s right for you.
This guide explains how the flat rate VAT scheme works, what the thresholds mean, how to register, and whether it’s the right decision for your business.
What is the Flat Rate VAT scheme?
The flat rate VAT scheme, or FRS, is a simple way to pay VAT once you are VAT-registered. Instead of calculating VAT on every sale and reclaiming it on each eligible purchase, you pay a fixed percentage of your total VAT-inclusive turnover to HMRC.
In practical terms:
- You charge VAT at 20% where applicable.
- You apply your industry’s flat rate percentage to your VAT-inclusive turnover.
- You pay that amount to HMRC.
- You keep the difference between the VAT you charge and the flat rate you pay.
Under the scheme, you generally cannot reclaim VAT on day-to-day purchases, apart from certain capital assets costing over £2,000, including VAT. For many contractors, the benefit is straightforward administration and more predictable VAT payments.
What is the Flat Rate VAT Threshold?
There are three important figures to understand when considering flat rate VAT.
- £90,000. This is the standard VAT registration threshold. If your taxable turnover exceeds £90,000 in a rolling 12-month period, you must register for VAT. This rule applies whether or not you use the flat rate VAT scheme.
- £150,000. This is the eligibility limit for joining the flat rate VAT scheme. To register, your expected VAT-taxable turnover must be £150,000 or less, excluding VAT, in the next 12 months. This is separate from the £90,000 registration threshold.
- £230,000. Once you are using the flat rate VAT scheme, you must leave it if your VAT-inclusive turnover exceeds £230,000.
For contractors with fluctuating income, monitoring these thresholds regularly is essential. Crossing a threshold unexpectedly could force you to change VAT methods mid-year, which may create compliance issues or affect your cash flow and reporting.
Who Is Eligible for the Flat Rate VAT Scheme?
Most VAT-registered businesses can apply to use the flat rate VAT scheme if they meet the turnover conditions and are not restricted by certain VAT arrangements.
However, for contractors, the limited cost trader rule is often the deciding factor.
You are generally treated as a limited cost trader if your spending on relevant goods is less than 2% of your VAT-inclusive turnover during a VAT period, or less than £1,000 per year (adjusted proportionally if needed). If this applies, you must use a flat rate of 16.5%.
Many IT contractors and consultants spend relatively little on goods, as most of their costs relate to services such as software subscriptions, insurance or professional fees. In these cases, the flat rate VAT scheme might be less beneficial than expected.
Before opting in, it is important to calculate the likely outcome for your business rather than relying on general assumptions.
How to Register for Flat Rate VAT
If your turnover exceeds £90,000, you must first register for VAT through HMRC.
When you register, you can apply to join the flat rate VAT scheme at the same time, or shortly afterwards. This process involves:
- Registering for VAT
- Selecting the correct flat rate percentage for your business sector
- Submitting quarterly VAT returns using the flat rate calculation
You must also comply with Making Tax Digital requirements. This means keeping digital records and submitting VAT returns using compatible cloud accounting software.
Is the Flat Rate VAT Scheme Right for You?
The flat rate VAT scheme can work well for service-based businesses with relatively low spending on goods and those who prefer simplified VAT administration.
However, it is not always the most tax-efficient option.
It may be less beneficial if you incur significant VAT on goods that you could otherwise reclaim under standard VAT accounting. It may also be less advantageous if you fall within the limited cost trader rules and must use the 16.5% rate. Businesses approaching the £230,000 exit threshold should also review whether the scheme remains appropriate.
Suitability depends on your business model, cost structure and growth plans.
Summary
The flat rate VAT scheme simplifies how VAT is calculated, but the thresholds and eligibility rules matter. Remember:
- £90,000 triggers VAT registration.
- £150,000 determines whether you can join the scheme.
- £230,000 determines when you must leave it.
- The limited cost trader rule can significantly affect contractors.
Before registering for the flat rate VAT scheme, it’s important to review your eligibility and understand the potential financial impact on your business. Get in touch if you would like us to review your figures and provide clear, practical guidance.
Author ProfileI'm the owner and Managing Director of Mollan & Co Accountants. I'm a skilled and efficient accountant with more than 20 years of experience in the industry.
I developed valuable skills in business and commercialisation through my work in the science and technology departments within the Scottish University sector. Then, in 2001, I formed my own internet-based marketing company, producing and distributing 360° virtual reality tours for the Scottish tourism sector.
I now use my commercial skills, expert tax knowledge and first-hand experience to help other businesses grow and flourish through strong accounting practice.
Our success at Mollan & Co is directly related to the success of our clients.
