What is Flat Rate VAT Scheme?
The Flat Rate VAT Scheme lets eligible small businesses pay a fixed percentage of gross turnover as VAT, simplifying their VAT accounting.
The Flat Rate VAT Scheme is a simplified VAT accounting method offered by HMRC for small businesses with a VAT-taxable turnover of £150,000 or less (excluding VAT). Instead of tracking VAT on every purchase and sale, you pay a fixed percentage of your gross (VAT-inclusive) turnover to HMRC.
How it works: 1. You charge VAT at the standard rate (20%) on your invoices as normal 2. You pay HMRC a lower flat rate percentage based on your business type 3. You keep the difference between what you charged and what you pay HMRC
Example flat rates (selected sectors):
- Accountancy: 14.5%
- Computer and IT consultancy: 14.5%
- Labour-only building or construction: 14.5%
- General building or construction: 9.5%
- Hairdressing: 13%
- Retailing not listed elsewhere: 7.5%
First-year discount: In your first year of VAT registration, you get an additional 1% discount on the flat rate.
Limited cost trader rules: If your goods purchases (excluding capital assets, food/drink, and vehicles) are less than 2% of your VAT-inclusive turnover or less than £1,000 per year, you are a limited cost trader and must use a flat rate of 16.5% - which removes most of the benefit.
Advantages:
- Much simpler bookkeeping - no need to track VAT on every purchase
- Potential to keep the difference between charged VAT and the flat rate
- Fewer errors and less time spent on VAT returns
Disadvantages:
- You cannot reclaim VAT on purchases (except capital assets over £2,000)
- Limited cost trader rules reduce the benefit for service businesses with few material costs
- Not suitable if you regularly make large purchases
Examples
An IT consultant charges £1,200 (inc. VAT) and pays HMRC 14.5% (£174), keeping the £26 difference
A general builder on the flat rate scheme pays 9.5% of gross turnover instead of standard VAT accounting
A freelance writer is classified as a limited cost trader and must use the 16.5% flat rate
Related Terms
VAT Reverse Charge
The VAT reverse charge is a mechanism where the customer, rather than the supplier, accounts for VAT on a transaction. It is mandatory for most B2B construction services in the UK.
Making Tax Digital (MTD)
Making Tax Digital is HMRC's initiative requiring businesses to keep digital records and submit tax returns using compatible software.
Gross vs Net
On a UK VAT invoice, net is the amount before VAT and gross is the total including VAT. In pay, gross is before deductions and net is take-home pay.
Invoice
An invoice is a commercial document issued by a seller to a buyer, listing the products or services provided and requesting payment.
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