How the scheme works
You still charge your customers VAT at the normal rate. But instead of paying HMRC the difference between the VAT you charged and the VAT you paid, you pay a fixed percentage of your VAT-inclusive turnover. You cannot reclaim VAT on purchases, except capital assets costing more than £2,000 including VAT.
The scheme makes money for businesses with few costs that carry VAT, and costs money for businesses that buy a lot of standard rated goods.
Can you join?
- You can join if you expect your taxable turnover, excluding VAT, to be £150,000 or less in the next 12 months.
- You must leave if your total turnover including VAT goes over £230,000.
- In your first year of VAT registration you get 1% off your sector rate.
The limited cost trader test
If your spend on relevant goods, including VAT, is less than 2% of your VAT-inclusive turnover, or less than £1,000 a year (£250 a quarter), you must use 16.5%, whatever your sector.
Relevant goods are goods used only for the business. These do not count:
- services of any kind, including rent, phone, software subscriptions and accountancy
- vehicles, vehicle parts and fuel (unless you run a transport business with your own or leased vehicle)
- food and drink for you or your staff
- capital expenditure goods
- goods for resale, leasing or hire if that is not your main business
- gifts, promotional items and samples
At 16.5% of gross turnover, the scheme takes almost all of the VAT you charge (1/6 of a VAT-inclusive figure is 16.67%), so most limited cost traders are better off on normal accounting.
Example
An IT contractor invoices £90,000 plus VAT in a year, so £108,000 including VAT. They spend £400 on goods.
Goods share£400 ÷ £108,000 = 0.37%, under 2%, so 16.5%
Flat Rate Scheme£108,000 × 16.5% = £17,820
Normal accounting£18,000 − £600 reclaimed = £17,400
Difference£17,820 − £17,400 = £420 more on the scheme
Without the limited cost trader rule, their sector rate of 14.5% would have meant £15,660, a saving of £1,740. That gap is why HMRC brought the rule in.
All sector rates
| Business type | Flat rate |
|---|---|
| Accountancy or book-keeping | 14.5% |
| Advertising | 11% |
| Agricultural services | 11% |
| Any other activity not listed elsewhere | 12% |
| Architect, civil and structural engineer or surveyor | 14.5% |
| Boarding or care of animals | 12% |
| Business services not listed elsewhere | 12% |
| Catering services including restaurants and takeaways | 12.5% |
| Computer and IT consultancy or data processing | 14.5% |
| Computer repair services | 10.5% |
| Entertainment or journalism | 12.5% |
| Estate agency or property management services | 12% |
| Farming or agriculture not listed elsewhere | 6.5% |
| Film, radio, television or video production | 13% |
| Financial services | 13.5% |
| Forestry or fishing | 10.5% |
| General building or construction services | 9.5% |
| Hairdressing or other beauty treatment services | 13% |
| Hiring or renting goods | 9.5% |
| Hotel or accommodation | 10.5% |
| Investigation or security | 12% |
| Labour-only building or construction services | 14.5% |
| Laundry or dry-cleaning services | 12% |
| Lawyer or legal services | 14.5% |
| Library, archive, museum or other cultural activity | 9.5% |
| Management consultancy | 14% |
| Manufacturing fabricated metal products | 10.5% |
| Manufacturing food | 9% |
| Manufacturing not listed elsewhere | 9.5% |
| Manufacturing yarn, textiles or clothing | 9% |
| Membership organisation | 8% |
| Mining or quarrying | 10% |
| Packaging | 9% |
| Photography | 11% |
| Post offices | 5% |
| Printing | 8.5% |
| Publishing | 11% |
| Pubs | 6.5% |
| Real estate activity not listed elsewhere | 14% |
| Repairing personal or household goods | 10% |
| Repairing vehicles | 8.5% |
| Retailing food, confectionery, tobacco, newspapers or children's clothing | 4% |
| Retailing pharmaceuticals, medical goods, cosmetics or toiletries | 8% |
| Retailing not listed elsewhere | 7.5% |
| Retailing vehicles or fuel | 6.5% |
| Secretarial services | 13% |
| Social work | 11% |
| Sport or recreation | 8.5% |
| Transport or storage, including couriers, freight, removals and taxis | 10% |
| Travel agency | 10.5% |
| Veterinary medicine | 11% |
| Wholesaling agricultural products | 8% |
| Wholesaling food | 7.5% |
| Wholesaling not listed elsewhere | 8.5% |
Questions
Can I reclaim VAT on a laptop on the Flat Rate Scheme?
Only if it costs more than £2,000 including VAT in a single purchase. Cheaper items are covered by the flat rate.
Does the 1% first-year discount apply to the 16.5% rate?
Yes. In your first year of VAT registration a limited cost trader pays 15.5%.
Which sector do I pick if I do two things?
Use the sector for the activity that brings in the most turnover. Check again each year on the anniversary of joining.