Flat Rate Scheme: Join Now or Never?

A restaurant manager and staff member collaborate on budgeting and operations, utilizing a tablet and calculator at a wooden table in a cozy cafe setting.

HMRC has recently published a report reviewing the Flat Rate Scheme (FRS)—a long-standing VAT option for small businesses. The findings raise questions about whether the scheme will continue in its current form, whether new entrants may soon be blocked, or even whether the scheme could be scrapped altogether.

A Quick History

The Flat Rate Scheme was introduced in 2002 to simplify VAT for small businesses. Back then, many firms still used manual records and spreadsheets. The scheme allowed businesses with turnover under £150,000 (ex VAT) to pay a fixed percentage of sales to HMRC, depending on their trade sector.

For many, it meant two advantages:

• Simplification of VAT reporting.

• Tax savings, since some sectors benefited from favourable flat rates.

• 
  

What Has Changed?

The appeal of the scheme has declined in recent years:

1. Making Tax Digital (MTD)

   Since MTD, all businesses must submit VAT returns digitally. While spreadsheets are still allowed, there must be a digital link to submission software. This has reduced the simplification benefit of the scheme.

2. Limited Cost Trader Rule (2017)

   HMRC introduced a punitive 16.5% rate for businesses spending little on goods. This wiped out tax savings for many service-based firms.

3. Consultants’ Findings

   HMRC’s report, prepared by external consultants, confirmed that most businesses only joined for tax savings. With those savings minimal and simplification no longer a strong incentive, many businesses are questioning the point of the scheme.

Could HMRC Abolish the Scheme?

The report suggests the government may:

• Block new users from joining in the future (“now or never”), or

• Abolish the scheme entirely, forcing existing users to revert to the normal VAT method (output tax less input tax).

• 
  

What Should You Do?

• If you haven’t joined yet, review whether it could still benefit your business—especially if you are not caught by the limited cost trader rule. Joining sooner rather than later could be key.

• If you’re already using FRS, be prepared for changes. Make sure you can switch to standard VAT accounting if required.

• Speak to your accountant before making a decision. The wrong choice could increase your VAT bill unnecessarily.

  
  

📌 Key Takeaway

The Flat Rate Scheme may not be around forever. For some businesses, it’s still worthwhile—but HMRC’s review suggests change is coming. It could truly be a case of “join now or never.”