Key facts
- Pay a fixed percentage of your VAT-inclusive turnover to HMRC.
- You still charge customers the standard 20% VAT rate.
- Eligibility: VAT taxable turnover must be £150,000 or less (excluding VAT).
- First-year discount: 1% off your flat rate percentage for the first 12 months.
How the VAT Flat Rate Scheme Simplifies Your Returns
Instead of tracking VAT on every purchase, you:[1]
- Charge your customers the normal 20% VAT
- Apply your industry’s flat rate percentage to your VAT-inclusive turnover
- Pay that amount to HMRC
- Keep the difference
Worked Example
You’re an IT consultant with a flat rate of 14.5%. In the quarter you invoice £30,000 + £6,000 VAT = £36,000 gross.
VAT to pay HMRC: £36,000 × 14.5% = £5,220
You keep: £6,000 − £5,220 = £780
Eligibility
- VAT taxable turnover must be £150,000 or less (excluding VAT) in the next 12 months
- You must be VAT-registered
- You must leave the scheme if your total business income exceeds £230,000 (including VAT) in any 12-month period[1]
Flat Rate Percentages
HMRC sets a percentage for each business type. Some common examples:[2]
| Business Type | Percentage |
|---|---|
| Accountancy or book-keeping | 14.5% |
| Computer repair | 10.5% |
| Hairdressing | 13% |
| Management consultancy | 14% |
| Pubs | 6.5% |
| Retailing of food, confectionery etc. | 4% |
See our full list of Flat Rate percentages by trade.
First-Year Discount
In your first year of VAT registration, you get 1% off your flat rate percentage.[1]
Limited Cost Businesses
If you spend less than 2% of your VAT-inclusive turnover on goods (or less than £1,000 per year), you’re a “limited cost business” and must use a flat rate of 16.5% regardless of your trade.[3]
This rule mainly affects service businesses with very low material costs (e.g. consultants, writers).
Capital Goods Exception
You can reclaim VAT on individual capital asset purchases of £2,000 or more (including VAT), even on the Flat Rate Scheme.
Pros and Cons
| Pros | Cons |
|---|---|
| Simpler admin — no need to track input VAT | You can’t reclaim VAT on most purchases |
| May pay less VAT than the standard scheme | 16.5% rate means some businesses pay more |
| Cash flow certainty | Must leave if turnover exceeds £230,000 |
Frequently Asked Questions
How does the VAT Flat Rate Scheme work?
You charge customers the normal 20% VAT but pay HMRC a lower fixed percentage of your VAT-inclusive turnover. The percentage depends on your trade type, and you keep the difference.
What is the turnover limit for the VAT Flat Rate Scheme?
Your VAT taxable turnover must be £150,000 or less (excluding VAT) in the next 12 months to join. You must leave if total business income exceeds £230,000 (including VAT).
What is a limited cost business under the Flat Rate Scheme?
If you spend less than 2% of your VAT-inclusive turnover on goods (or under £1,000 per year), you are a limited cost business and must use a flat rate of 16.5% regardless of your trade.
Do I get a discount in my first year on the Flat Rate Scheme?
Yes. In your first year of VAT registration you receive a 1% discount off your flat rate percentage, which can make the scheme even more cost-effective.
Can I reclaim VAT on purchases under the Flat Rate Scheme?
Generally no — you cannot reclaim input VAT on most purchases. The exception is individual capital assets costing £2,000 or more (including VAT), which can still be reclaimed.
Further Reading
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Sources
- VAT Flat Rate Scheme — GOV.UK
- Flat Rate Scheme percentages — GOV.UK
- Limited cost business — GOV.UK