First year discount: can you make a belated claim?

Basic principles

The flat rate scheme (FRS) can be used by any business that expects its taxable sales in the next twelve months will be less than £150,000 excluding VAT. Scheme users do not declare output tax and claim input tax on their returns, instead applying a fixed percentage to their VAT-inclusive sales at the end of each period. The percentage will depend on your business activity, e.g. hairdressers have a rate of 13% and accountants, 14.5%. There are two sweep-up categories if you cannot find your business in the list, namely “any other activity not listed elsewhere” and “business services not listed elsewhere”.

All percentages are adjusted to reflect the input tax that you cannot claim.

The relevant percentage is also applied to your zero-rated and exempt sales, which is not good if you have unpredictable rates of VAT on your sales. For example, a builder who does zero-rated work on new dwellings and standard-rated work on commercial buildings might be wise to leave, or not join, the scheme.

As an exception, you can claim input tax if you buy capital goods costing more than £2,000 including VAT. Note the reference to capital goods, such as a computer or van. You cannot claim on capital services, e.g. an extension to your premises.

1% discount

As an incentive to join the scheme, you can discount your relevant percentage by 1% in the first year that you are registered for VAT. In other words, a hairdresser will apply a rate of 12% and an accountant will use 13.5%. If your business joins part-way through your first year of registration, you will only apply the discounted rate for the balance of that year.

Example. John is a florist and registered for VAT on 1 July 2025, submitting calendar quarter returns. He joined the FRS at the beginning of quarter 3, i.e. 1 January 2026. He can claim a 1% discount on his relevant FRS percentage until 30 June 2026.

The 1% discount can only be claimed if you registered for VAT on time or less than twelve months late. If you registered more than twelve months late, you cannot claim it.

Belated claim?

If your business did not claim the 1% discount but was entitled to do so, you have made errors on your past returns, i.e. you overpaid VAT. Errors on past returns can be corrected up to four years ago, so it is not too late to make a belated claim.

Your strategy is as follows:

1. Review your calculations for the periods in the first year of registration and work out how much tax you have overpaid, i.e. by reducing your declared rate by 1% and claiming the difference.
2. The amount overpaid will be less than £10,000, the error correction limit for a small business, so you can adjust it on your next return.

As you have overpaid tax declared in Box 1 on past returns, you will reduce this figure on your next return and not make a positive entry in Box 4.