VAT Flat Rate Scheme - What is the Flat Rate VAT Scheme?

The VAT Flat Rate Scheme is a way of paying VAT whereby a business pays a fixed percentage of its annual turnover.

The VAT Flat Rate Scheme is designed to help simplify the VAT Return process for small businesses. It's intended to ensure that businesses pay roughly the same amount of VAT without having to complete as much paperwork as other VAT schemes.

With the Flat Rate Scheme, businesses keep the difference between the amount of VAT paid to HMRC and the amount of VAT paid by customers. 

However, unlike other VAT schemes, businesses paying a flat rate usually can't reclaim VAT on purchases (although there are some exceptions for capital assets worth over £2,000).

Can I use the VAT Flat Rate Scheme?

To join the VAT Flat Rate Scheme, your business must:

Unlike other VAT accounting schemes, businesses looking to use the VAT Flat Rate Scheme must apply to HMRC. It's also recommended that you speak to an accountant or professional tax consultant before joining the scheme to find out whether the scheme is right for your business.

Who cannot use the VAT Flat Rate Scheme?

Certain businesses can’t join the VAT Flat Rate Scheme, including those which:

  • Left the scheme within the past 12 months

  • Have committed a VAT offence within the past year, such as VAT evasion

  • Are closely associated with another business – for example, two businesses that have close financial or organisational ties

If you're no longer eligible to be part of the VAT Flat Rate Scheme, you're required to leave. Participants have the right to leave the scheme at any point.

How much will I pay under the VAT Flat Rate Scheme?

Under the VAT Flat Rate Scheme, the tax you pay is calculated by multiplying your VAT flat rate by your VAT-inclusive turnover.

For example, if you have a turnover of £10,000 and a flat rate of 10%, you would pay a flat rate of £1,000 (10% of £10,000).

Your flat rate is set according to the type of business you run and how much you spend on goods. However, all businesses get a 1% discount in the first year they’re registered for VAT.

Flat rates for limited-cost businesses

If your business spends a small amount on goods, you’re classified as a ‘limited-cost business’ or ‘limited-cost trader’, and you must pay a higher flat rate of 16.5%.

To be classed as a limited-cost business, you must not spend more than 2% of your turnover on goods. If you spend less than £1,000 per year on goods, you are still considered a ‘limited-cost business’, even if £1,000 is more than 2% of your revenue.

When calculating how much you spend on goods, you shouldn’t include purchases such as capital goods or assets, food and drink, vehicles or vehicle parts (unless you run a vehicle hiring business).

Flat rates for different business types

If your business isn’t considered a limited-cost trader, your flat rate will depend on the type of business you run. There are different flat rates for different industries.

At the lowest end, retailers that sell food, confectionery, newspapers, tobacco or children’s clothing have a flat rate of 4%. At the higher end, accountants, bookkeepers, computer and IT consultants, civil and structural engineers, architects, and surveyors have a flat rate of 14.5%.

HMRC has a full list of flat rates for different kinds of businesses.

Pros and cons of the VAT Flat Rate Scheme

The VAT Flat Rate Scheme has several benefits, including:

  • Helping businesses manage cash flow

  • Lower fixed rates than the standard rate

  • Easier record-keeping

However, the scheme isn’t beneficial for everyone. This might include businesses that spend very little on goods, such as service providers, or businesses that regularly buy and sell goods from outside of the UK, as this makes the scheme more complex.