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HMRC internal manual

VAT Flat Rate Scheme

Policy and Background: What are the policy principles underlying the scheme?

An overview is given in Notice 733 VAT Flat rate scheme for small businesses. You should bear in mind the following policy principles when dealing with queries about the scheme:

  • The scheme calculates net tax by reference to flat rate percentages. Those flat rate percentages are simply a short cut to calculating net tax and are not “rates of VAT.” That is why FRS users issue invoices for the normal VAT rate for the supply.
  • The scheme does not negate a business’ ‘right to deduct’ input tax, as the flat rate percentages have an allowance for input tax built into them. The flat rate scheme simply removes the need to calculate output tax and input tax separately.
  • The FRS is a ‘special scheme for small undertakings’ and operates under a special provision of Council Directive 2006/112/EC (Article 281). It must be revenue neutral in its application across the board, although individual businesses may be “winners” or “losers”. However, the scheme remains valid because the flat rate percentages are set to provide tax neutrality across the eligible population.