VAT Flat Rate Scheme (FRS) calculation in FreeAgent

This article explains how FreeAgent handles the UK's VAT Flat Rate Scheme (FRS) and the resulting calculations.

Differences on the VAT return

Remember that if your business uses the VAT Flat Rate Scheme, the VAT return will usually show output VAT only. Your business can't reclaim any input VAT except on pre-registration costs and on the purchase of capital assets costing over £2,000.

FreeAgent will identify these purchases for you so long as you add the bill, out-of-pocket expense or explain the bank payment as a purchase of a capital asset.

Other costs can be recorded in FreeAgent using the correct VAT rate or amount that is shown on the bills or receipts that you have. You can show the VAT you have paid but, don't worry, those costs will not show on your VAT return unless the above situations apply.

Do be aware that when you're on the VAT Flat Rate Scheme, FreeAgent will include all your sales income on which it works out the flat rate percentage (this income is called your "flat rate turnover"), including income that would otherwise be exempt from VAT or zero-rated for VAT.

Basic FRS VAT Calculation

The Flat Rate Scheme (FRS) for VAT calculation can be quite confusing. It is usually expected that the VAT is calculated from the net figure, i.e. your sales excluding the VAT you charged to your customers, but the VAT is actually calculated from the gross figure (VAT inclusive turnover, or your sales including the VAT you charged to your customers) under FRS.

For example, if an invoice is £1,000, plus 20% VAT, this comes to £1,200 including VAT. If the FRS VAT percentage was 13.5% then you’d calculate this percentage on the amount including 20% VAT (£1,200), and not the amount before VAT (£1,000). 13.5% of £1,200 = £162 so this is the amount of VAT to pay and will appear in the box 4 column on the VAT return Full Report.

HMRC publishes a list of the Flat rates for types of business and provide a good example of the FRS calculation on their website, alongside some other useful information about the Flat Rate Scheme.

Income that will not be part of the calculation

There is, however, some income that shouldn't be included as part of your VAT flat rate turnover calculation, such as sales of services to businesses outside the UK. HMRC specifies that these sales should be reported in box 6 but not be part of your flat rate turnover, so there is no VAT to pay on them.

Joining or leaving the VAT flat rate scheme

If your business joins or leaves the VAT Flat Rate Scheme or your flat rate itself changes, you need to change the setting on the VAT return itself, for each VAT return following the change.