Research and analysis

Attitudes toward the VAT Flat Rate Scheme

Published 24 April 2025

Prepared by Ipsos for HMRC

Authors: Andrew Shaw, Oliver Gooding, Rachael O’Donovan (all from Ipsos)

The views in this report are the author’s own and do not necessarily reflect those of HM Revenue and Customs

1. Executive summary

1.1 Research background and aims

The VAT Flat Rate Scheme (FRS) was introduced in 2002 with the intention of simplifying VAT for small businesses. After the implementation of Making Tax Digital (MTD), research was needed to understand the ongoing effectiveness and relevance of the FRS. In order to investigate this, HMRC commissioned Ipsos to undertake qualitative research into business’ attitudes toward the FRS and their use of it.

Findings from this research will inform any future policy decisions around the FRS and the development of options impacting small businesses.

1.2 Method

Ipsos undertook qualitative interviews with 50 UK businesses across the following categories:

• users: businesses aware of the FRS who currently use it

• ex-users: businesses aware of the FRS who previously used it but do not currently

• non-users: businesses who have never used the FRS and may or may not be aware of it

Interview questions prompted participants to consider why they currently use, stopped using, or never used the FRS. Interview questions also asked about the impact of the scheme on their business planning and on their experiences of MTD.

1.3 Key findings

Findings from the research suggest that:

• the main reasons businesses use the FRS are to simplify VAT and to gain a financial advantage

• a reduction in financial advantage was the reason some businesses left the FRS

• the benefit of simplifying VAT is not enough incentive to use the FRS if using it creates a financial disadvantage

• the FRS made the introduction of MTD easier for some businesses, but for others there was little to no impact of the FRS on MTD

• for some businesses, MTD lessened the simplification advantage provided by the FRS

• the upper turnover limits for remaining on the scheme had little impact on businesses’ growth decisions because businesses either; prioritised growth over the benefits of the scheme, had no desire to grow, or were unlikely to become ineligible even after growth

• even though the eligibility limits did not affect decisions to grow, businesses valued the FRS and some stated that they would be disappointed at having to leave the scheme if they grew too large to be eligible

• changes to the FRS in the past few years reduced some positivity toward the scheme, such as increases in VAT rates, but businesses still appreciated it

2. Background and methodology

2.1 Research background

The VAT FRS was introduced in 2002 to help simplify VAT submissions for small businesses. Under the FRS, businesses pay a fixed rate of VAT at each submission and can keep the difference between what they charge customers and pay to HMRC. Businesses cannot reclaim VAT on purchases, except certain capital assets over £2,000. The flat rate of VAT that businesses using the scheme pay varies depending on the business’ trade sector. The scheme should be revenue neutral, but some businesses will pay more or less VAT if they use the FRS depending on the value of the business’ expenses.

In 2021 to 2022, around 10% of the VAT-registered population used the FRS, which was only around 17% of businesses eligible to join the scheme.

The way businesses submit their VAT returns changed following the introduction of MTD (MTD) in 2019 for businesses over the VAT registration threshold and in 2022 for businesses below this threshold. Research was needed to understand the effectiveness and relevance of the FRS now that MTD must be used by all VAT-registered businesses.

HMRC commissioned Ipsos to undertake qualitative research into business’ attitudes toward the FRS and their use of it. This qualitative study explored the impact of the FRS on eligible businesses and provided a deeper understanding of the use of the scheme, its relevance, and the impact of MTD on the objectives of the scheme. The research focused on the following areas:

• business’ awareness and understanding of the FRS

• why eligible businesses choose to use or not use the FRS

• the impact of the FRS on businesses that use it, including any impacts on their decision to grow or not

• the interaction between MTD and the FRS

• the impact of MTD on perceptions of the FRS

Findings from this research will inform any future policy decisions around the FRS and the development of options impacting small businesses.

2.2 Sampling and recruitment

Ipsos undertook qualitative interviews with 50 UK businesses across the following categories:

• users: businesses aware of the FRS and who currently use it

• ex-users: businesses aware of the FRS and previously used it but do not currently

• non-users: businesses who have never used the FRS and may or may not be aware of it

Businesses classified as Users, Ex-users, and Non-users aware of the scheme were analysed and reported upon as separate groups in this report. However, the group of Non-users unaware of the scheme was very small, so it was not analytically robust to report findings based on this group alone. Therefore, where relevant, we have combined unaware and aware Non-users into one group for the purposes of analysis and reporting. Some findings are only relevant to aware Non-users, so it was still necessary to refer to them separately in some cases. References to each of these groups is made clear throughout the report using the terminology explained in this paragraph.

Quotas were set on these participant types to ensure data was collected from businesses with different levels of awareness and use of the FRS. Table 2.1 below shows the numbers of interviews achieved with businesses from each of these types.

Table 2.1: Participant sample type

Participant sample type	Count
User	20
Ex-user	15
Non-user	15

Participant business size and sector was also monitored to ensure a range of business types were represented in the data. The number of interviews achieved with businesses of each size and sector is shown in Table 2.2 and Table 2.3 below.

Table 2.2: Participant business size

Business size (number of employees)	Count
0	30
1-2	15
3-10	3
10+	2

Table 2.3: Participant business sector

Business sector	Count
Administration and support	4
Arts, entertainment, and leisure	5
Automotive and engineering	2
Construction	1
Financial	3
Health and social care	1
IT and communications	8
Manufacturing	5
Professional and technical	18
Retail and wholesale	3

Participant businesses were recruited from a sample of businesses eligible for the FRS provided by HMRC. An advance email was sent to all businesses in the sample, which provided them with information about the research, their data protection rights, Ipsos’ privacy policy, and a named Ipsos contact to ask questions of and to email to opt in or out of the research. After an opt-out period of 10 days, a specialist external recruitment partner contacted businesses that had opted into the research or had not opted out. They checked their eligibility for the research by asking for their current and any previous usage of the FRS, their awareness of the FRS, and their business size. Eligible businesses were then invited to take part in an interview.

2.3 Method

Fieldwork ran from 1 February to 8 March 2023. Interviews lasted 45 minutes to 1 hour and were conducted via Microsoft Teams or telephone by members of the Ipsos research team and approved moderators. Interviews were semi-structured and included questions that encouraged participants to consider why they use, stopped using, or never used the FRS. Interview questions also asked about the impact of the scheme on their business and on their experience of MTD.

2.4 Note on qualitative research and use of verbatim quotes

Since this is a qualitative piece of research, conclusions about the prevalence of themes and other quantified statements are avoided as the sample was not representative of the population of businesses eligible for the FRS. The value of qualitative research lies instead in its ability to investigate the nuances and reasons behind participant experiences and opinions, which was required to answer this project’s research questions.

Quotes from participants are used throughout this report to illustrate points or themes. These quotes are attributed to participants by their current FRS use status, their business type, and their accountant use. Different participants may have the same characteristics, so quotes with attributions with the same characteristics are not necessarily from the same participant.

As the sample was not representative, opinions or experiences mentioned in quotes that are attributed to a business with certain characteristics should not be taken as generalisable to others with the same characteristics.

3. Awareness and understanding

3.1 Sources of information

The businesses in our sample typically first heard of the FRS from their accountants or their wider professional networks. These networks included professional colleagues, other business owners in their industry, clients, and freelancers. Non-users aware of the scheme were more likely to have heard about the scheme from professional networks than from their accountants.

Participants of all types felt HMRC could do more to advertise the FRS because their main sources of information were their accountant or word-of-mouth.

“Had I not been notified of it by my accountant, I wouldn’t be aware of it.” (Ex-user, Executive search consultant, Accountant user)

3.2 Personal research

Non-users aware of the scheme were least likely to carry out further research into the FRS after first hearing about it. This is because they thought the scheme was not relevant to them, they were not interested in it, or they trusted their accountant’s advice not to use it. Users and Ex-users that did no research and heard about the FRS from their accountant also trusted that the information from their accountant was correct.

“I did no research. That’s what I pay the accountant for.” (User, Professional services, Accountant user)

Participants that did research the FRS tended to look on gov.uk, other websites such as accounting blogs, or asked their accountant for more information.

Participants that used gov.uk reported the information on there was enough for them to make a decision on whether to use the FRS. However, some felt that the website would be better if it compared the FRS and other VAT schemes, such as the Cash Accounting Scheme and the Annual Accounting Scheme. Some participants also felt that the website did not help businesses who did not clearly belong in any of the business sectors that the website said were eligible for the FRS. This could be because their business spans more than one sector or is very niche and does not fit into any sector easily.

“It didn’t really make sense on the website [gov.uk]… I really was not sure if the flat rate applied to my type of business… I don’t want to apply and get it wrong. I don’t want to get on the wrong side of HMRC… so I just left it.” (Non-user, IT hardware distribution, Accountant user)

Businesses had generally not done any further research into the FRS since their initial decision to enrol, unenroll, or never enrol in the scheme. There were, however, some businesses that regularly calculated whether it was financially advantageous to remain on the scheme.

3.3 Levels of understanding

Businesses who used the FRS for simplification or for financial advantage provided similar descriptions of the scheme when asked. There was also no large difference between the definitions provided by Users and Ex-users. However, Users and Ex-users knew more detail about the scheme than Non-users who are aware of the scheme.

Some businesses knew that the aim of the FRS was to simplify VAT submissions, especially Users and Ex-users. Other businesses were not sure of its aim but knew the benefits of using it. Some businesses that chose to use the FRS for financial advantage still understood that its aim was to simplify VAT submissions, even though this was not the main reason they joined the scheme in the first place.

“The aim is to stop people having to spend their time adding up invoices… to just make things easy and simple.” (Ex-user, Management consultancy, Accountant user, Reason for using FRS: financial advantage)

Businesses who did not understand the FRS very well often let accountants choose whether to use it and to administer it for them. Businesses commonly relied on accountants for information about whether the scheme was right for their business and other general information about it. There were several examples in our sample of businesses enrolling in or leaving the scheme based purely on the advice of their accountant.

“I just decided on the recommendation from my accountant to set it up and join the scheme.” (User, Financial services, Accountant user)

“I didn’t understand how to join or leave it, but I didn’t have to because the accountants took care of that.” (Ex-user, IT products and services, Accountant user)

Some aware Non-users also never enrolled onto the scheme based on the advice of their accountant and did not know why their accountant had advised that. They simply trusted that their accountant knew what was best for their business.

“The accountants say to keep them [my companies] all as standard VAT. I don’t know why.” (Non-user, Website design and support, Accountant user)

“I was advised against it from day one by my accountant. It wasn’t cost effective, which is all I know… I don’t know why it would cost more money.” (Non-user, Sales hardware, Accountant user)

4. Use and benefits

4.1 Reasons for using the FRS

Businesses initially enrolled in the FRS to simplify managing their VAT or to benefit from the financial advantage that a lower VAT rate would provide. Businesses typically chose to use the FRS for one of these reasons and then benefitted from the other as a welcome, unintended consequence. This was not the case for all businesses, however.

Simplification

The FRS simplified VAT submissions for businesses by making the calculation of how much VAT they owe simpler. It also allowed them to spend less time calculating and paying VAT, and it removed the need to monitor expenses or collect and store VAT receipts. Users were more likely than Ex-users to state simplification as the main reason for using the FRS. Small businesses with 0 to 2 employees were more likely than larger businesses to use the FRS for simplification, even if there was no financial advantage.

“I love the FRS… It’s so easy for a small business like me to do as I only need to apply one rate to one figure.” (User, Clothing wholesale, Accountant user, Reason for using: simplification)

Financial advantage

Some businesses chose to use the FRS because it could provide them with a financial advantage. This advantage was the ability to charge customers 20% VAT but pay a lower rate to HMRC and keep the difference. Businesses cannot claim back VAT on business expenses below £2,000 when using the FRS, which should make using the FRS revenue-neutral. However, the financial advantage was higher for businesses with very few expenses, such as those providing only a service, and was lower for business with more expenses, such as those selling products. Ex-users were most likely to have enrolled in the FRS to benefit from this financial advantage.

“I saw that you can make money by being a VAT collector for HMRC. I could keep a proportion through the FRS… paying 13.5% and charging 20%. It was a relatively simple decision [to use it].” (User, Management consultancy, No accountant use)

5. Benefits of using the FRS

Both Users and Ex-users had positive opinions of the scheme and felt it provided a benefit to their business. Businesses mentioned simplicity and financial advantage as benefits of using the FRS, even if one of these was not the initial reason that they decided to use the scheme. For some businesses there was no financial advantage, and for others the simplification was appreciated but not enough of a benefit to stay on the scheme if there was no financial advantage. Businesses that chose to use the FRS to gain a financial advantage still recognised the simplification benefit. Businesses who experienced a financial advantage reported using the extra funds to invest back into their business, or to add to overall cashflow to help their small business grow or survive the first years of business.

“It was simple, it was quick. Didn’t have to copy invoices. You just use a percentage, calculate it, and off you go.” (Ex-user, Management consultancy, Accountant user, Reason for using: financial advantage)

“There are less chances of making errors on the flat rate [scheme] as you don’t have to keep all your expense receipts and calculate them up… you just apply one rate at 14.5%” (Ex-user, Finance and portfolio managers, No accountant use)

Businesses also mentioned, unprompted by interview moderators, that they liked the 1% discount in VAT rates in the first year of using the FRS. This was especially appreciated by new businesses who benefited from the extra money in one of their first years of business where cashflow is essential to survival.

“I like the fact that there is a 1% discount for the first year. Some people can take long time to build their businesses so might benefit from this discount being extended more than a year.” (User, Digital marketing, Accountant user)

Some participants spontaneously mentioned benefits of being VAT registered outside the context of the FRS. Some participants from particularly small businesses, for example those with under £50,000 turnover, were aware that they were not required to be registered for VAT as their turnover was below the £85,000 threshold for mandatory VAT registration. They had chosen to register for VAT because they felt their clients were more likely to use their services or products if they were VAT registered. One business mentioned that they expected to grow above £85,000 turnover in the future, so were pre-empting this by registering for VAT ahead of this. This was not the case for every small business interviewed and this finding should not be taken as representative of small businesses.

5.1 FRS eligibility limits

Businesses can join the FRS if their turnover excluding VAT is under £150,000, and can stay on the scheme until their turnover is over £230,000 including VAT or their business becomes ineligible in another way.

Opinions on eligibility limits

Some businesses felt this upper eligibility limit of £230,000 annual turnover was reasonable. This was because they understood the scheme was aimed at small businesses and would be less needed by larger businesses. However, others felt the upper turnover limit could be higher because prices and business costs have increased since the scheme began. Therefore, a business’ turnover could increase without any increase in profit. This opinion was most common among businesses with £85,000 turnover or more who are expecting to reach the upper eligibility limit after a few years of growth.

“Particularly as this is something aimed at small businesses, it’s a reasonable set of parameters.” (Ex-user, Executive search consultant, Accountant user)

“The departure threshold is too low nowadays. Everything has got more expensive.” (Ex-user, Editorial services, Accountant user)

Some participants mentioned that the reasonability of the limit depended on what kind of business you were. For example, some participants mentioned that because the turnover limit for joining the FRS does not include VAT, but the upper limit for being able to stay on the FRS does include VAT, the range of turnovers that are eligible is quite narrow. They were concerned that it would not take some businesses very long to move between these turnovers and would only benefit from the FRS for a short time.

One business mentioned being uncertain of how eligibility is calculated. For example, they did not know whether the limit of £230,000 relates to end of year turnover or if they must earn below a quarter of £230,000 every financial quarter. This was worrisome for them as they have turnover that fluctuates heavily throughout the year, so they were not sure when they are likely to become ineligible and did not want to be caught off guard.

Eligibility limits and business growth

Businesses reported that the FRS’s eligibility limits did not affect their decisions about whether to grow. This was because either they prioritised growth over receiving the benefits of the FRS, they were a small business so are unlikely to be ineligible even after growth, or they had no desire to grow. Businesses with no desire to grow were typically businesses with 0 employees or owned by those nearing retirement age who were focussed on maintaining rather than growing their business. One business mentioned worrying about keeping track of whether they were eligible if they grew. However, this was because they did not want to unexpectedly find themselves ineligible when they had not prepared for changing VAT schemes, and not because they worried about losing the benefits of the FRS.

“I’d definitely choose to grow over staying on the FRS.”  (User, CX Consultant, Accountant user)

“This limit has no impact on my growth plans… I will grow because I want to grow, that is regardless of a threshold.” (User, Business consultancy, Accountant user)

“We have no ambition to grow… we don’t need the aggravation of managing staff, which we will need if we expand.” (User, Legal services, Accountant user)

6. Non-use and drawbacks

6.1 Reasons for leaving or never using the FRS

Ex-users stopped using the FRS when it was no longer financially beneficial or it became more expensive to be on the scheme than not. Business’ accountants advised them to leave the scheme for these reasons or the businesses noticed this themselves and chose to leave. For example, a digital repair and computer renting company was advised by their accountant to use the FRS, so they enrolled in it. This business had high expenses, such as repair equipment and computers, that were below £2,000 so they could not claim the VAT back on these while enrolled on the FRS. They felt that they were paying too much VAT for the simplification benefit of the FRS to be worthwhile. Therefore, they stopped using the FRS and felt that their accountant had advised them to enrol incorrectly.

“The FRS wasn’t working for us. Maybe a misunderstanding between me and the accountant… He didn’t think we were purchasing a great deal. I only did it for one quarter then realised it was unbelievable what I’m being charged [in VAT]. It’s only a one-way loss for us on the FRS.” (Ex-user, Digital repair and computer renting, Accountant user)

Aware Non-users had never used the scheme due to a lack of knowledge about it, a lack of need for simplification, because it would be too expensive to not claim back VAT on business expenses, or because it would not provide a financial advantage. Aware Non-users that used accountants were typically advised not to use it. Those without accountants undertook their own research into the scheme and decided not to use it.

One businesses had not used the FRS because they had concluded they were ineligible for it, which was inaccurate and was a conclusion drawn in the absence of accountant advice. They believed that their sector was ineligible for the FRS as they could not find clear information on their sector on the gov.uk website, so they decided not to use it. They had not researched their eligibility since making the initial decision not to use the FRS when they first set up their business.

Non-users aware of the FRS acknowledged that it could simplify VAT for them if they were to use it, but for some this was not enough of an incentive to enrol. This was especially the case when they felt there was no financial incentive for them or they felt that using the standard rate was already simple enough.

6.2 Drawbacks and undesirable features of the FRS

Businesses felt there were very few or no drawbacks to the FRS when it is understood as a simplification scheme. They also did not have many negative things to say about the process of enrolling in the FRS and paying VAT using the scheme. Some businesses did experience issues with applying for the FRS or paying VAT when using it. However, these issues did not stand out as themes in the analysis as they were unique to each business. For example, one participant reported struggling with filling out forms related to VAT, and another reported not receiving confirmation from HMRC that they had enrolled or unenrolled, which they said they would have found useful.

Businesses that used the FRS for financial advantage and viewed the scheme in this way felt features that reduced this advantage were ‘drawbacks’ of the scheme. These features included the inability to claim VAT on expenses under £2,000, the inability to leave and re-join the scheme whenever it suited them, and the increase in VAT rates under the FRS over the past few years. Ex-users were more likely to report these features as undesirable than other participant types. This aligns with the finding that Ex-users typically stopped using the scheme due to financial disadvantage or a loss or reduction of financial advantage.

Participants felt there was a lack of advertising by HMRC to raise awareness of the scheme among eligible businesses. Participants explained that information about the FRS would have been most useful when they were first setting up their business or first becoming VAT registered. This is because they would have liked to have known all their options before deciding whether to enrol and because they needed the most help when their business was very young. Some participants acknowledged that an accountant could do this for them, but others would have liked to have had the options presented to them.

Participants also mentioned that the simplification benefit of the FRS has since been lessened following the introduction of MTD. This is explained further in Chapter 6.

7. MTD and the FRS

7.1 Experiences of MTD across participant types

Experiences of MTD varied among participant types. Ex-users had the most positive experience of MTD, such as finding it easy or useful. They tended to have experience using digital accounting before the introduction of MTD or used an accountant to deal with VAT for them. Users had mixed experiences of MTD that depended on their comfort with accounting software, whether they used an accountant, and the time and resources they had to manage the process of submitting VAT returns using MTD. Non-users had the most negative experiences of MTD, such as finding it complex or time-consuming. They were also less engaged with MTD and VAT in general than other participant types.

Businesses that used accountants to set up MTD or manage it for them found the transition to MTD easier. These businesses were less able to comment on the interaction between the FRS and MTD as they were not as involved with it.

7.2 Impact of MTD on experiences and perceptions of the FRS

The introduction of MTD had minimal impact on business’ experiences of the FRS.

Businesses who used accountants to manage MTD and tax affairs for them did not notice a difference as they are not involved in their VAT return process anyway.

Businesses who manage VAT using MTD themselves also felt that MTD made little difference to their experience of the FRS. They explained that the process of calculating and paying VAT using MTD is the same even if a business pays a flat or variable rate of VAT.

Though MTD did not affect businesses’ experiences of using the FRS, it changed some businesses’ perceptions of it. Some businesses explained that the simplification advantage provided by the FRS was less apparent now they are using MTD and that MTD itself brought simplification advantages by automatically making calculations, regardless of whether a flat or variable rate of VAT is being used.

“The administrative ease of FRS compared to tallying VAT transactions means nothing as everything has to be inputted in the software now.” (Ex-user, Management training, Accountant user)

“At the moment, there’s very little financial incentive left on the FRS. It’s on simplification and there isn’t much of that benefit now because everything is digital.” (User, Admin and support services, No accountant)

7.3 Impact of the FRS on experiences and perceptions of MTD

Users and Ex-users reported that the FRS did not have a large impact on how they viewed or experienced MTD. This was especially the case for those that used digital accounting before the introduction of MTD. They explained that this was because MTD involves inputting figures into a software, which is a very similar process whether using a variable or a fixed rate of VAT. Therefore, using a fixed rate did not typically make the transition to digital accounting easier or harder for businesses. However, some businesses reported that using the FRS made switching to MTD slightly easier as the information they needed to upload was simpler.

Aware Non-users also mentioned that if they were to use the FRS, they do not think it would make using MTD any easier or harder for the same reason.

“You use software to submit your returns. This is same for both FRS and variable rates.” (User, Management consultant, Accountant user)

“Software works out the VAT for me. FRS wouldn’t add any more simplification.” (Non-user, Television productions, Accountant user)

“The submission is just the same… you just put in two figures: the amount of VAT and turnover per quarter.” (User, IT consultancy, No accountant)

Use of the FRS did not affect which accounting software businesses decided to use for MTD. Instead, businesses generally chose software if their accountant suggested it or if it was free. Businesses typically referred to the list of MTD compatible software on the HMRC website or used the one their accountant suggested.