Certain firms may be authorised to use the optional flat-rate scheme (FRS) to calculate their VAT liability as an ‘appropriate percentage’ of their turnover.

The FRS aims to be tax neutral, i.e. the VAT paid by a FRS user should be similar to what they would declare with normal VAT accounting. The FRS helps certain traders, e.g. if there is lower than average input tax levels for that particular trade, but the FRS is bad news for others.

Also, the FRS should not change significantly the total amount of VAT collected by HMRC.

Apparently, about half of all VAT-registered persons are eligible to join, so the FRS is potentially important. HMRC have claimed that the FRS: