What is the Flat Rate VAT Scheme UK?

The Flat Rate VAT Scheme lets eligible small businesses pay a fixed percentage of their gross turnover as VAT, rather than calculating the difference between VAT charged and VAT paid on purchases. It simplifies VAT accounting but the flat rate percentage varies by trade, ranging from 4% to 16.5%.

Who can use the Flat Rate VAT Scheme?

You can join if your VAT-taxable turnover (excluding VAT) is £150,000 or less. You must leave the scheme if your total business income exceeds £230,000 including VAT. You must be VAT-registered to use the scheme.

Does the Flat Rate VAT Scheme save money?

It depends on your trade and expenses. Businesses with low costs (like consultants) often pay more on the flat rate scheme because the limited cost trader rate of 16.5% is high. Businesses with significant material costs may save money. You need to compare both methods using your actual figures.

What is a limited cost trader?

A limited cost trader is a business that spends less than 2% of its gross turnover on relevant goods, or less than £1,000 per year (whichever is greater). Limited cost traders must use a flat rate of 16.5%, which usually makes the scheme uncompetitive. Most service-based businesses are classed as limited cost traders.

Flat Rate VAT Scheme — Is It Worth It for Your Business? | PocketWise

The Flat Rate VAT Scheme is designed to simplify VAT for small businesses. But simpler does not always mean cheaper. This guide explains how it works, which businesses benefit, and when standard VAT is a better option.

How the Flat Rate Scheme Works

Standard VAT vs Flat Rate

Feature	Standard VAT	Flat Rate Scheme
What you charge customers	20% VAT on sales	20% VAT on sales (same)
What you pay HMRC	VAT charged minus VAT on purchases	Fixed percentage of gross turnover
Can you reclaim VAT on purchases?	Yes	No (except capital assets over £2,000)
Record keeping	Full VAT records required	Simplified — no input VAT tracking

Example

Standard VAT	Flat Rate Scheme (IT consultant at 14.5%)
Sales: £50,000 + £10,000 VAT = £60,000	Gross turnover: £60,000
Purchases: £5,000 + £1,000 VAT	Flat rate: 14.5% × £60,000 = £8,700
Pay HMRC: £10,000 − £1,000 = £9,000	Pay HMRC: £8,700
Saving on flat rate: —	£300 better off

In this example, the flat rate scheme saves £300. But results vary significantly depending on your trade and expenses.

Flat Rate Percentages by Trade

Business type	Flat rate %
Accountancy or bookkeeping	14.5%
Architect, civil and structural engineer	14.5%
Boarding or care of animals	12%
Building or construction services	9.5%
Computer and IT consultancy	14.5%
Hairdressing and beauty	13%
Journalism	12.5%
Labour-only building and construction	14.5%
Management consultancy	14%
Photography	11%
Plumbing or heating	9.5%
Post offices	5%
Printing	8.5%
Publishing	11%
Real estate and property	14%
Repairing personal or household goods	10%
Secretarial services	13%
Transport or storage	10%
Waste or scrap dealing	10.5%
Any other activity not listed	12%
Limited cost trader	16.5%

You get a 1% discount in your first year of VAT registration.

The Limited Cost Trader Rule

This rule significantly reduces the scheme’s appeal for many businesses.

Test	Threshold
Spend on relevant goods	Less than 2% of gross turnover
Or	Less than £1,000 per year (whichever is greater)
If you meet either test	You are a limited cost trader
Flat rate	16.5% (regardless of your trade)

What Counts as Relevant Goods?

Counts	Does not count
Stock for resale	Services (subcontractors, professional fees)
Raw materials	Capital goods (computers, vehicles)
Consumable office supplies	Food and drink for yourself or staff
Stationery	Vehicle costs (fuel, repairs)

Most service-based businesses — consultants, freelancers, IT contractors, designers — are limited cost traders because they spend very little on physical goods.

Limited Cost Trader Example

	Standard VAT	Flat Rate (16.5%)
Gross turnover	£60,000	£60,000
VAT charged	£10,000	£10,000
VAT on purchases	£1,000	Cannot reclaim
Pay HMRC	£9,000	£9,900
Difference	—	£900 worse off

At 16.5%, the flat rate scheme costs this business £900 more per year than standard VAT.

Who Benefits from the Flat Rate Scheme?

Likely to benefit

Business type	Why
Trades buying significant materials	Low flat rates (9.5%) and high goods costs
Retailers with low margins	Low flat rates and high stock costs
New VAT-registered businesses	Extra 1% discount in year one
Businesses wanting simplicity	Less admin, even if savings are minimal

Unlikely to benefit

Business type	Why
Service businesses with few goods costs	Limited cost trader rate of 16.5%
IT contractors and consultants	14.5% or 16.5% is usually more than standard VAT
Freelancers	Low goods purchases trigger limited cost trader rate
Businesses with large capital purchases	Cannot reclaim VAT on purchases under £2,000

How to Join

Step	Action
1	Check your turnover is below £150,000 (excluding VAT)
2	Log in to your HMRC online account
3	Apply through the VAT section
4	Start using the scheme from the beginning of a VAT period

How to Leave

Reason	How
Voluntary	Write to HMRC or contact them online — you can leave at any time
Compulsory	You must leave if your total income exceeds £230,000 (including VAT)
When it takes effect	From the start of the next VAT period

Should You Use the Flat Rate Scheme?

Decision Checklist

Calculate your VAT liability under both standard VAT and the flat rate for the last 12 months
Check if you are a limited cost trader (most service businesses are)
If you are a limited cost trader at 16.5%, the scheme is almost certainly not worth it
Consider the value of simpler bookkeeping — is the admin saving worth a small cost difference?
Are you planning large capital purchases? You cannot reclaim VAT on items under £2,000

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