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The Flat Rate VAT Scheme

If your business is registered for VAT, it may be worth considering whether the Flat Rate Scheme is right for you.

The scheme is designed to simplify VAT accounting for eligible businesses. However, whilst some businesses may benefit financially from the scheme, for many the main advantage is administrative simplicity. Before joining, it is important to understand how the scheme works and whether it suits your business.

What is the VAT Flat Rate Scheme and which businesses can join it?

The Flat Rate Scheme is a simplified VAT accounting scheme available to eligible small businesses.

Under the scheme, you charge VAT to your customers in the normal way. However, instead of calculating VAT payable to HMRC as the difference between VAT charged on sales and VAT incurred on purchases, you pay a fixed percentage of your VAT-inclusive turnover.

Businesses using the Flat Rate Scheme cannot usually reclaim VAT on purchases and expenses, although an exception may apply to certain capital asset purchases costing £2,000 or more including VAT.

The scheme can reduce the amount of VAT administration required of you, but it is not suitable for every business. Depending on your circumstances, you may be financially better off using the standard VAT accounting method.

Who can join the Flat Rate Scheme?

If you own or run a VAT-registered business you can usually join the Flat Rate Scheme if its VAT taxable turnover is expected to be no more than £150,000 (excluding VAT) in the next 12 months.

Once in the scheme, different turnover limits apply for remaining eligible. Your business generally cannot rejoin the Flat Rate Scheme within 12 months of leaving, and other exclusions may apply. You can check the details on the GOV.UK website.  

What is a Limited Cost Trader?

Some businesses using the Flat Rate Scheme are classed as Limited Cost Traders. This is usually the case if a business only spends a small amount purchasing relevant goods. Consultancy, IT, marketing, design and professional service businesses are potentially examples of limited cost traders. HMRC applies special rules to determine whether a business falls into this category.

If you are a Limited Cost Trader, you must normally use a flat rate percentage of 16.5%, regardless of your business sector.

This can significantly affect the amount of VAT payable under the scheme and may reduce or remove any financial advantage of joining the Flat Rate Scheme.

Therefore it is important to check whether the Limited Cost Trader rules apply to your business before joining the scheme and review your position regularly.

HMRC provides detailed guidance on what counts as relevant goods and how to determine whether a business is a Limited Cost Trader.

Should I join the Flat Rate Scheme?

Whether the Flat Rate Scheme is right for your business depends on your circumstances. While some businesses benefit from the scheme, others may find that the standard VAT accounting method is more appropriate.

Before deciding, consider the following factors:

Your business expenses

Businesses using the Flat Rate Scheme cannot usually reclaim VAT on purchases and expenses, except for certain capital asset purchases costing £2,000 or more including VAT.

As a result, the scheme may be more attractive to businesses with relatively low VAT-bearing costs and less attractive to businesses that regularly incur significant standard-rated expenses.

Your flat rate percentage

The percentage you pay depends on the nature of your business. Before comparing the Flat Rate Scheme with standard VAT accounting, make sure you have identified the correct flat rate percentage.

You should also check whether the Limited Cost Trader rules apply, as these may require you to use the higher 16.5% rate regardless of your business sector.

Comparing the costs

For example, a business charges £20,000 VAT on taxable sales of £100,000.

Under standard VAT accounting, the business would pay HMRC the VAT charged on sales less any recoverable VAT on purchases and expenses.

If the business uses a flat rate of 11%, it would pay:

11% × £120,000 = £13,200 under the Flat Rate Scheme.

As long as the business could reclaim more than £6,800 VAT from purchases, it is likely to be better to remain in the standard VAT scheme. 

Other considerations

The Flat Rate Scheme can be more complex where a business:

  • makes a significant amount of zero-rated or exempt supplies
  • trades internationally
  • has overseas customers or suppliers
  • operates in more than one business sector.

If any of these apply, you may wish to seek professional advice before joining the scheme.
Your business expenses

Businesses using the Flat Rate Scheme cannot usually reclaim VAT on purchases and expenses, except for certain capital asset purchases costing £2,000 or more including VAT.

As a result, the scheme may be more attractive to businesses with relatively low VAT-bearing costs and less attractive to businesses that regularly incur significant standard-rated expenses.

Your flat rate percentage

The percentage you pay depends on the nature of your business. Before comparing the Flat Rate Scheme with standard VAT accounting, make sure you have identified the correct flat rate percentage.

You should also check whether the Limited Cost Trader rules apply, as these may require you to use the higher 16.5% rate regardless of your business sector.

Comparing the costs

For example, a business charges £20,000 VAT on taxable sales of £100,000.

Under standard VAT accounting, the business would pay HMRC the VAT charged on sales less any recoverable VAT on purchases and expenses.

If the business uses a flat rate of 11%, it would pay:

11% × £120,000 = £13,200 under the Flat Rate Scheme.

As long as the business could reclaim more than £6,800 VAT from purchases, it is likely to be better to remain in the standard VAT scheme. 

Other considerations

The Flat Rate Scheme can be more complex where a business:

  • makes a significant amount of zero-rated or exempt supplies
  • trades internationally
  • has overseas customers or suppliers
  • operates in more than one business sector.

If any of these apply, you may wish to seek professional advice before joining the scheme.

What flat rate of VAT will I pay?

The flat rate percentage depends on the type of business you operate. Examples include:

  • IT consultancy (14.5%)

  • Hairdressing (13%)

  • Property management services (12%)

  • Food manufacturing (9%)

HMRC publishes a full list of business sectors and the corresponding flat rate percentages.

If your business is classed as a Limited Cost Trader, you must normally use a flat rate percentage of 16.5%, regardless of your business sector.

Because this rate is significantly higher than many sector rates, it can substantially reduce the financial benefit of using the Flat Rate Scheme.

For example, if a business issues a £500 invoice plus £100 VAT, the customer pays £600 in total.

  • At a 12% flat rate, VAT payable to HMRC would be £72.

  • At the 16.5% Limited Cost Trader rate, VAT payable to HMRC would be £99.

Therefore it is really important to check whether the Limited Cost Trader rules apply to your business before joining the scheme.

First-year discount

Businesses joining the Flat Rate Scheme receive a 1% reduction in their flat rate percentage during their first year of VAT registration. The reduction applies until the day before the first anniversary of VAT registration.

How do I apply to join the Flat Rate Scheme?

You can usually join the Flat Rate Scheme if:

  • you are VAT registered; and
  • you expect your VAT taxable turnover to be no more than £150,000 (excluding VAT) in the next 12 months.

Many businesses join the scheme when registering for VAT. Existing VAT-registered businesses can also apply to join through HMRC.

Before applying, make sure you:

  • have identified the correct business sector;
  • have checked whether the Limited Cost Trader rules apply; and
  • have considered whether the Flat Rate Scheme is likely to be beneficial for your business.

HMRC provides guidance on joining the scheme and any exclusions that may prevent a business from participating.

If you are unsure whether the scheme is right for your circumstances, consider seeking advice from an accountant or tax adviser before applying.