Self-Employment Guides UK — Tax, Business Setup, and Running Your Own BusinessFlat Rate VAT Scheme — Is It Worth It for Your Business?
How the Flat Rate VAT Scheme works, who can use it, the rates for different trades, and whether it saves you money compared to standard VAT accounting.
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
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