The VAT Flat Rate Scheme (FRS) is a simplified way of accounting for VAT, available where a business expects taxable turnover of £150,000 or less (excluding VAT). Instead of tracking input VAT on every purchase, the business pays a fixed percentage of its VAT-inclusive turnover and keeps the difference.
For contractors, the FRS is much less attractive than it once was because of the limited cost trader rule. A business that spends less than 2% of its turnover (or less than £1,000 a year) on goods must use the 16.5% flat rate, which for a typical labour-only contractor wipes out almost all of the FRS benefit. The limited-cost test is applied each VAT period, so a contractor can move in and out of the 16.5% rate.
The firm's stance is that, since the 16.5% rate was introduced in April 2017, the FRS is rarely worthwhile for a labour-only contractor. It can still suit a contractor with genuine, regular goods spend above the test, or one who values administrative simplicity, but standard VAT accounting should always be modelled against the applicable FRS percentage before choosing the scheme. The compulsory VAT registration threshold is £90,000. See VAT Notice 733 for the scheme rules.