Understanding the Pros and Cons of the VAT Flat Rate Scheme

Value Added Tax (VAT) is a significant consideration for businesses, impacting cash flow, administrative workload, and overall profitability. For businesses with a VAT exclusive turnover of £150,000 or less, the VAT Flat Rate Scheme (FRS) offers a simplified approach to VAT accounting. However, deciding whether to adopt this scheme requires careful consideration of its benefits and drawbacks. Our Accounts Manager, Amy Daniels, goes through the pros and cons in her latest blog below.

What are the advantages of the VAT Flat Rate Scheme?

One significant advantage of the VAT Flat Rate Scheme is its simplicity. Unlike traditional VAT accounting, where you must track VAT on sales and purchases separately, FRS applies a flat rate to total turnover, reducing administrative tasks. This streamlined process is particularly advantageous for smaller businesses, saving valuable time and effort.

Another benefit is the potential to pay less VAT to HMRC compared to traditional accounting methods. The scheme allows businesses to retain the difference between the VAT charged to customers and the VAT paid to HMRC, potentially enhancing profit margins. This can be especially beneficial for businesses with low expenses on VAT-able purchases.

The predictability of VAT payments under the Flat Rate Scheme is another plus. Applying a fixed percentage to turnover helps in forecasting VAT liabilities more accurately, improving financial planning and cash flow management. This predictability is especially useful for businesses with consistent income and minimal variations in VAT-able transactions.


Are there any disadvantages to using the VAT Flat Rate Scheme?

Despite its advantages, the VAT Flat Rate Scheme may not be ideal for every business. A significant drawback is the inability to reclaim VAT on most purchases, with the exception of certain capital assets costing over £2,000 inclusive of VAT. Businesses with high VAT on supplies may find this aspect of the scheme disadvantageous.

Moreover, the fixed rates set by HMRC might not perfectly match your business’s specific VAT situation. These rates are meant to approximate the average VAT payable across various industries, but businesses with unique cost structures or profit margins could find the scheme less beneficial.

Future business growth is another factor to consider. As your turnover increases, the fixed percentage applied to your turnover may lead to higher VAT payments compared to traditional VAT accounting. This potential increase could reduce the cost-saving benefits of the scheme over time.


Utilise LWA’s expertise to make an informed decision

Before deciding whether to adopt the VAT Flat Rate Scheme, it is crucial to evaluate your current VAT position, including the proportion of VAT-able sales and purchases, and consider potential future changes in turnover.


At LWA. we offer tools to help you decide whether joining or leaving the Flat Rate Scheme is advantageous for your business. For tailored advice, feel free to contact a member of our Accounts team. We’re here to assist you in making informed decisions about your VAT strategy to ensure it aligns with your financial objectives. You can email our Accounts Manager, Amy Daniels via mail@lwaltd.com (add VAT FRS as the subject) or call us on 0161 905 1801 in Manchester or 01925 830 830 in Warrington.