The VAT Flat Rate Scheme is a simpler way for small businesses to handle VAT. You charge customers the normal VAT, but you pay HMRC a fixed percentage of your turnover instead of working out the VAT on every sale and purchase.
How the scheme works
On the standard method you work out the VAT on every sale and every purchase, then pay HMRC the difference. On the Flat Rate Scheme you skip most of that. You pay a set percentage of your VAT inclusive turnover, and you keep the rest of the VAT you charged.
In return, you usually cannot reclaim VAT on purchases. The one main exception is capital assets that cost more than £2,000 including VAT.
Who can join
You can join if your VAT taxable turnover is £150,000 or less, not counting VAT. You apply to HMRC to join the scheme.
You have to leave the scheme once your total turnover, including VAT, goes over £230,000.
Flat rate percentages
Your percentage depends on your type of business. HMRC sets a rate for each trade. A few examples give the idea.
| Type of business | Flat rate |
|---|---|
| Computer or IT consultancy | 14.5% |
| Accountancy or bookkeeping | 14.5% |
| Catering, including takeaways | 12.5% |
| Retail of food and newspapers | 4% |
| Any other activity not listed | 12% |
These are examples only. Check your exact rate on GOV.UK.
In your first year as a VAT registered business you get a 1% discount on your flat rate.
The limited cost trader rate
There is a catch for businesses that spend little on goods. If your spending on goods is very low, under 2% of your turnover or below a set cash amount, you are a limited cost trader. You then use a flat rate of 16.5%, which usually removes any benefit of the scheme.
[ Infographic: How the Flat Rate Scheme works ]
Brief: show charging normal VAT to customers, then paying HMRC a fixed percentage of turnover, and keeping the difference.
Alt text: The Flat Rate Scheme, charging normal VAT but paying HMRC a fixed percentage of turnover.
Caption: Charge normal VAT, pay HMRC a flat percentage, keep the gap.
Is it worth joining
The scheme saves time and can save money, but not for everyone. It helps most when your flat rate is low and you have few costs with VAT on them. If you buy a lot of goods and services with VAT, the standard method may leave you better off, because you could reclaim more. Our flat rate versus standard calculator compares the two for your figures.
Frequently asked questions
How does the VAT Flat Rate Scheme work? You charge customers normal VAT but pay HMRC a fixed percentage of your VAT inclusive turnover, and you usually cannot reclaim VAT on purchases.
Who can use the Flat Rate Scheme? Businesses with VAT taxable turnover of £150,000 or less, excluding VAT.
What is the limited cost trader rate? A flat rate of 16.5% for businesses that spend very little on goods. It usually removes the benefit of the scheme.
Can I reclaim VAT on the Flat Rate Scheme? Usually no, apart from capital assets costing more than £2,000 including VAT.
Is there a discount in the first year? Yes. You get a 1% reduction on your flat rate for your first year of VAT registration.