The VAT Flat Rate Scheme

How does the Flat Rate Scheme work?

You still charge customers VAT at the normal rate, usually 20%. What changes is what you pay HMRC: a fixed percentage of your gross turnover (turnover including VAT) instead of output tax minus input tax. In exchange you give up reclaiming VAT on most purchases.

The one exception is capital assets costing more than £2,000 including VAT in a single purchase.

The percentage depends on your business type. HMRC publishes 54 sector rates. The Flat Rate Scheme calculator lists all of them and compares the scheme with normal accounting for your figures.

What are the flat rates for common businesses?

HMRC sets 54 flat rates by business type. The rates below run from 7.5% for general retail to 14.5% for accountants, IT consultants and labour-only builders. Pick the sector that brings in most of your turnover, and check again on each anniversary of joining if your mix changes.

Who does the Flat Rate Scheme suit?

The scheme pays off when your costs carry little VAT. Think consultants, designers and trades who mostly sell their time but still buy enough goods to avoid the limited cost trader rate. It works against you if you buy a lot of standard rated goods, because that VAT is lost.

It also saves admin. You do not need to work out input VAT line by line. You still need digital records and Making Tax Digital software for your returns.

Who can join, and when must you leave?

You can join if you expect taxable turnover, excluding VAT, of £150,000 or less in the next 12 months. You must leave if your total business income including VAT goes over £230,000, and tell HMRC within 30 days. You can join when you register or later.

• Join: £150,000 or less, measured on expected taxable turnover for the next 12 months, excluding VAT.
• Leave: over £230,000, measured on total business income, including VAT.

• Apply online or by post to HMRC.
• You cannot join if you left the scheme in the last 12 months.
• You also cannot join if you are closely tied to another business, for example as part of a VAT group.
• You can leave voluntarily at any time by telling HMRC. You then have to wait 12 months to rejoin.

What is the limited cost trader rule?

If you spend very little on goods, you are a limited cost trader and must use 16.5%, whatever your sector. The test runs each VAT period. You are caught if your relevant goods, including VAT, cost less than 2% of your VAT-inclusive turnover or less than £1,000 a year.

The £1,000 limit is pro rata for the period, so it is a quarter of that on a quarterly return. Relevant goods are goods used only for your 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 using your own or a leased vehicle
• food and drink for you or your staff
• capital expenditure goods
• goods for resale, leasing or hire, unless that is your main business
• gifts, promotional items and samples

At 16.5% of gross turnover, the scheme takes almost all of the VAT you charge. The VAT in a VAT-inclusive figure at 20% is one sixth, or 16.67%. Most limited cost traders are better off on normal accounting.

How does the first-year discount work?

In your first year of VAT registration you get 1% off your flat rate. A management consultant pays 13% instead of 14%, and a limited cost trader pays 15.5%. The discount ends the day before the first anniversary of your VAT registration, not of joining the scheme.

Can you reclaim VAT on capital assets?

Yes, on a single purchase of capital goods costing more than £2,000 including VAT, such as a van or a piece of machinery. Claim it in box 4 of the return. If you sell it later, you charge VAT and pay it to HMRC on top of your flat rate.

Several cheaper items bought together do not count, even if the total is over £2,000. Services never count, however much they cost.

How do you fill in the VAT return?

On the Flat Rate Scheme, box 1 is your flat rate turnover including VAT multiplied by your flat rate. Box 6 is that flat rate turnover. Box 4 holds only VAT on capital assets over £2,000. Include zero rated and exempt sales in flat rate turnover.

• Box 1: flat rate turnover (including VAT) × your flat rate.
• Box 4: VAT on capital assets over £2,000, if any.
• Box 6: flat rate turnover including VAT.

Apply the flat rate to all of your flat rate turnover, whatever the VAT rate on each sale.

Worked example: a management consultant

A management consultant invoices £60,000 plus VAT in a year, so £72,000 including VAT. They spend £6,000 including VAT on standard rated costs. Of that, £1,800 is goods (stationery, a printer, small equipment).

The goods are 2.5% of turnover (£1,800 ÷ £72,000) and over £1,000, so the limited cost trader rule does not apply.

Either way the consultant charges clients £12,000 of VAT. Under normal accounting they reclaim the VAT on costs. On the scheme they reclaim nothing on costs and pay the flat rate instead.

In the first year of registration the rate is 13%: £72,000 × 13% = £9,360, a saving of £1,640.

If the same consultant had spent only £600 on goods, they would be a limited cost trader. They would pay £72,000 × 16.5% = £11,880, which is £880 more than normal accounting.

The VAT you keep on the scheme is extra business income, so it counts towards your profit for income tax or corporation tax.

What to do next

• Put your own figures into the Flat Rate Scheme calculator to compare it with normal accounting.
• Find your sector on HMRC's Flat Rate Scheme rates page, the official list.
• Check the limited cost trader test every VAT period, not just when you join.
• If your income including VAT goes over £230,000, tell HMRC within 30 days.

This guide is general information. Check gov.uk or ask an accountant about your own case.

Figures in this guide come from our rules file, last checked against HMRC on 4 October 2026.