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Dealing with VAT on a Flat Rate Scheme

  • Updated

If you’re using the Flat Rate Scheme (FRS), Business Finance Assistant (BFA) is designed to support you, including during VAT return preparation. Here's how it works:

How VAT works under the Flat Rate Scheme

  • You charge VAT at the standard rate (e.g. 20%) on your invoices, just like normal.
  • But instead of calculating VAT based on your purchases and sales, you pay a fixed percentage of your VAT-inclusive turnover to HMRC.
  • This fixed rate depends on your business type – for example:
    • 9% for IT consultants
    • 12% for retail
  • If it's your first year of VAT registration, you can apply a 1% discount on your flat rate.

Example:

  • You invoice a customer for £1,200 (£1,000 net + £200 VAT).
  • Your flat rate is 10%.
  • You pay 10% of £1,200 = £120 to HMRC.
  • The remaining £80 of collected VAT is kept by you.

 

How BFA supports the Flat Rate Scheme

BFA helps automate your VAT tracking and reporting while on the scheme:

  • VAT is applied on each transaction based on the rate you select (e.g. 20%, 5%, 0%).
  • No adjustment is needed to Box 6 of the VAT return. BFA correctly includes the VAT-inclusive figures, even though HMRC’s wording says “Total value of sales excluding VAT.”

  • Your flat rate percentage is applied automatically to calculate how much VAT you owe to HMRC.
  • VAT Returns can be submitted directly to HMRC via Making Tax Digital (MTD).
  • BFA also supports VAT Reverse Charge and CIS deductions, where relevant.

Important note on Reverse Charge transactions

If you're on the Flat Rate Scheme and using the Reverse Charge VAT rate (e.g. for certain construction or overseas services), there’s a known limitation in BFA:

  • BFA currently includes Reverse Charge transactions in its VAT calculations.
  • However, under FRS, Reverse Charge supplies shouldn’t affect your VAT return; you don't pay VAT on these amounts as there’s no additional income to report.

This means your VAT return in BFA might incorrectly show VAT due on these transactions.

 

What you can do:

  1. Make sure Reverse Charge expenses are categorised correctly using the appropriate VAT rate.
  2. Review the VAT report before submission.
  3. If the figures are incorrect, you may need to adjust the VAT return manually before submitting it:

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We’re actively reviewing this behaviour and will keep you updated on any changes to improve support for this scenario.

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