The VAT Flat Rate Scheme explained

You still charge your customers VAT at the normal rate, but instead of working out the VAT on every sale and every purchase, you pay HMRC a single fixed percentage of your gross (VAT-inclusive) turnover. The percentage depends on your trade sector. In return for the simplicity, you generally cannot reclaim the VAT on your purchases, apart from capital assets costing £2,000 or more. It is designed to cut the admin of VAT for smaller businesses.

It depends on your business. If you have low costs and little VAT to reclaim, the flat rate can leave you better off as well as simpler. If you buy a lot of goods or services with VAT on them, you usually lose more by not reclaiming that VAT than you save, so the standard scheme is better. The "limited cost trader" rule (16.5%) also removes most of the benefit for businesses that spend little on goods. We model both schemes on your actual figures so you pick the one that costs you least.

You can apply to join if you are VAT registered and expect your VAT-taxable turnover to be £150,000 or less (excluding VAT) in the next 12 months. You have to leave the scheme once your total business income exceeds £230,000. There are also a few situations where you cannot use it, for example if you recently left the scheme or are part of certain VAT groups. We can check your eligibility and handle the application.

A limited cost trader is a business that spends very little on goods, specifically, less than 2% of its turnover (or less than £1,000 a year) on goods. If that is you, HMRC makes you use a flat rate of 16.5% regardless of your sector, which is high enough that the scheme rarely benefits you. It was introduced to stop low-cost service businesses gaining too much from the flat rate. Many contractors and consultants fall into this category, which is why the scheme is often not worth it for them.

Generally no. The trade-off for the simplicity is that you cannot reclaim the VAT on your day-to-day purchases. The one exception is capital assets, such as equipment or machinery, costing £2,000 or more including VAT in a single purchase, where you can reclaim the VAT as normal. If reclaiming VAT on your costs matters to your business, that is usually a sign the standard VAT scheme suits you better.

Neither is better in every case. The standard scheme lets you reclaim VAT on your purchases, which wins when you have significant VATable costs. The Flat Rate Scheme is simpler and can leave you with a margin when your costs are low, but you give up reclaiming input VAT and may be pushed onto the 16.5% limited cost rate. The only reliable way to choose is to run your real numbers through both, which is exactly what we do before recommending one.