The flat rate scheme was set up to simplify VAT returns for a small business who make yearly taxable sales of less than £150,000. What is it, exactly, and can you claim input tax if you join the scheme?

What is the Flat Rate Scheme?

The amount of VAT your business pays or claims back is usually the difference between VAT charged by you to your customers and the VAT you pay on the things you buy.  The FRS is different.

  • You pay fixed rate VAT
  • You keep the difference between the VAT you charge and pay
  • You can’t reclaim VAT on purchases except for some capital assets over £2000

3 circumstances to claim input tax under the Flat Rate Scheme

In principle, the FRS means you can’t claim input tax because the scheme’s percentages reflect the average input tax you’ve sacrificed in your category. But there are three exceptions. Here’s when you can claim:

  1. You can claim pre-registration input tax on your first VAT return, just the same as a business not in the scheme, for example for services you bought in the six months before registration, and as long as four years before for goods. Better still, you get an extra 1% discount on the standard scheme percentages in your first year as a VAT registered business. Remember that the 1% discount only applies in the first 12 months of VAT registration, not the first 12 months you’re in the scheme.

2. You can claim on capital goods costing more than £2000 inc. VAT. If, for example, you buy a van for £6000 plus VAT, you can claim input tax. The only thing is, you need to be dead certain your claim relates to capital goods, not capital services.

3. You can claim post-deregistration expenses if you leave the scheme on the day before you deregister. This means output tax on sales made on the final date of registration have to be accounted for, and standard rate stock or assets where input tax was claimed, when the assets exceed £5000. You can also claim input tax on spending incurred on the final day, and on your post deregistration expenses.

Should you join the FRS?

To join the scheme, you have to apply to HMRC. But it’s important to talk to an accountant or tax expert first, to check the Flat Rate Scheme is right for your business, dependant on:

  • Who are your customers?
  • The rate of VAT applicable to your services or goods
  • The purchase of fixed assets.
  • Etc.