What is the VAT Flat Rate Scheme?

The Flat Rate Scheme is an alternative way to pay your VAT to HMRC, which can save you valuable time when it comes to your quarterly bookkeeping.

Instead of paying the difference between the VAT you charge customers and the VAT you reclaim on business purchases, you can pay a fixed rate based on your total sales.

This helps simplify your reporting as you can keep less detailed VAT records. That, along with the government’s Making Tax Digital plans, means you’ll be able to maximise efficiency when it comes to your business admin.

Is the flat rate VAT scheme right for your business?

The Flat Rate Scheme isn’t the right choice for all businesses. Depending on your sector, you may find that you pay more VAT this way than through standard VAT accounting.

A few things to consider when making your decision:

using flat rates means you can’t claim VAT back on goods you buy, except for certain capital assets over £2,000
if you make a lot of zero-rated or exempt sales, the Flat Rate Scheme might mean you pay more VAT than you need to

Is my business eligible for the flat rate?

To be eligible for the VAT Flat Rate Scheme, you must expect that your VAT taxable turnover will be £150,000 or less in the next 12 months. You must also be a VAT-registered business.

However, you won’t be eligible to rejoin the scheme if you’ve left it within the last 12 months.

You’ll have to leave the scheme if your business grows to the point that:

you expect your annual turnover to be more than £230,000 in the next 12 months
your turnover, on the anniversary of joining the scheme, is over £230,000 for the past 12 months
you expect your total income in the next 30 days alone to be more than £230,000 (including VAT)

What are the flat rates?

The flat rate vat percentages vary depending on your main type of business activity, usually ranging from four to 16.5 per cent. You can find details on how much you pay on the government website.

Example: VAT Flat Rate Scheme

If the flat rate for your business is 14.5 per cent and your total sales for a quarter are £10,000 (including VAT) – your VAT liability would be £1,450.

If you run a limited cost business, you would have to use the 16.5 per cent flat rate, and pay £1,650.

VAT Flat Rate Scheme for new businesses

The VAT Flat Rate Scheme can offer a simpler approach to VAT accounting for new business owners because you don’t need to track VAT on most individual purchases.

But to join the scheme, a new business must expect its VAT taxable turnover in the next 12 months to be £150,000 or less (excluding VAT). You then receive a one per cent discount on the applicable flat rate percentage during the first year of your VAT registration.

Just make sure you register your business to the correct sector and pay the right rate of VAT. And check if your business would be considered a ‘limited cost business’.

What are limited cost businesses?

HMRC defines you as a limited-cost business if your goods cost less than either:

two per cent of your turnover
£1,000 a year (if your costs are more than two per cent)

As a limited cost business, you’ll pay a 16.5 per cent flat rate.

In 2017, HMRC specified this new higher rate for ‘limited cost businesses’ as some businesses had previously been able to use the scheme to their economic benefit.

For example, the flat rate paid to HMRC on sales could be lower than the VAT rate businesses charge to their customers, so businesses could keep the difference.

Now it’s likely that these changes to the VAT Flat Rate Scheme in 2017 have made the scheme less attractive for small businesses in terms of cost-saving, but you’ll still be able to benefit from saving time on your VAT reports.

Advantages and disadvantages of the flat rate VAT scheme

The scheme won’t suit every business. To help see if the flat rate VAT scheme is right for you, we’ve evaluated the pros and cons.

Advantages of the flat rate VAT scheme

The scheme offers a simplified way of accounting. You don’t need to track VAT on most individual purchases as you would with the typical way of working out your VAT liability.

And it’s much easier to predict what your VAT bill will be each quarter because it’s based on a fixed percentage against your turnover. This can make cash flow forecasts much more straightforward.

The simpler approach also means you’re less likely to make mistakes on your reporting, reducing the risks of a fine from HMRC.

Disadvantages of the flat rate VAT scheme

A significant downside of the scheme is that you can’t reclaim VAT on your purchases. This is a particular issue for businesses that buy lots of goods.

And in some cases, businesses that purchase a high amount of goods can end up paying more VAT through the flat rate scheme. Because even though you’re paying a lower rate of VAT, you’ll miss out on reclaiming VAT and potentially end up spending more.

How to join the flat rate VAT scheme?

The first step is making sure you’re registered for VAT. Once you’re set up, you can apply for the scheme online if your business is eligible. To join the scheme, your business must have an estimated VAT taxable turnover for the next 12 months that’s £150,000 or less (excluding VAT).

And your business must not meet any of the following criteria:

you’ve left the scheme in the past year
you’ve committed a VAT offence in the last 12 months
you’ve joined a VAT group in the last 24 months
you’ve joined a margin or capital goods VAT scheme
you’ve registered for VAT as a business division in the last two years

Which is better, flat rate VAT or standard VAT?

It all depends on how your business operates. If you regularly purchase a high number of goods, the flat rate VAT scheme might not be for you, because you can’t reclaim VAT.

And if you don’t purchase enough goods and are categorised as a ‘limited cost business’ you may end up paying a higher rate of VAT with the flat rate scheme.

But there’s a sweet spot for some businesses who purchase a reasonable amount of goods whilst accessing a lower rate of VAT through the scheme. These businesses also benefit from the simplified approach to accounting the scheme offers.

Summary: understanding the VAT Flat Rate Scheme?

For a small business, the flat rate VAT scheme lets you pay a fixed percentage of your total sales to HMRC. Instead of tracking every single purchase to calculate how much VAT you owe.

The scheme also eliminates the need to reclaim VAT on your purchases, meaning your quarterly VAT bill will be easier to predict. And you’ll also get a one per cent discount on your VAT bill.

But it’s not suitable for every business. Make sure you look at the individual rate for your business’s sector and take into account the amount of goods your business buys.

You can then evaluate whether your business would benefit more from a simplified, flat rate approach to VAT, or stick to the standard rate.

Frequently asked questions

Is the first £85,000 VAT-free?

Yes, the first £85,000 of your business’s taxable turnover is VAT-free. The flat rate VAT threshold increased to £90,000 in April 2024 (previously £85,000). So the first £90,000 of your taxable turnover is VAT-free and once it goes over that, you need to register, start charging, and pay VAT.

What is the flat rate for VAT?

There isn’t a single ‘flat rate’ for VAT. The rate of VAT you’ll pay under the flat rate VAT scheme depends on a few factors. The sector your business is in and the amount of goods you purchase will determine your VAT rate.

How do you calculate VAT on a flat rate?

To calculate your VAT on a flat rate you’ll need to check the rate for your business’s sector or see if your business is considered ‘limited cost’. Once you know your rate, you then apply it to your business’s total sales for the three month period.

Am I better off on flat rate VAT?

You’re better off on the flat rate of VAT if you don’t buy too many goods with VAT on them and want a simpler approach to accounting. If you’re a limited cost business or you purchase a high number of goods, the scheme might not be suitable.

When should I leave the flat rate scheme?

If your VAT taxable turnover exceeds £230,000 in any 12-month period, you must leave the scheme. But it could be worth leaving the scheme sooner depending on your circumstances.

If your business starts buying more goods with VAT, your accounting is becoming too complex, or you become a ‘limited cost business’, it might be worth considering leaving the scheme

If I don’t buy many goods but use a lot of services, is the flat rate VAT scheme still beneficial?

The limited cost business rule only applies to goods, not services. So if your business doesn’t fall into that category and your sector has a VAT rate that’s lower than the standard 20 per cent, the scheme can still be beneficial.

Can I use the flat rate scheme if I sell abroad?

Yes, you can, but it does add an extra layer of complexity to your VAT accounting. The scheme was designed to simplify domestic sales for small businesses, so if you have a large number of international sales, it’s worth contacting a tax professional.

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Flat rate VAT scheme: a simple guide for small businesses