VAT Flat Rate Scheme

VAT Flat Rate Scheme: the short answer

The VAT Flat Rate Scheme is optional. Instead of paying HMRC the VAT on your sales less the VAT on your purchases, you pay a fixed percentage of your VAT-inclusive turnover. The percentage usually depends on your business type, but a limited cost business uses 16.5%.

You keep the difference between the VAT you charge customers and what you pay HMRC. That difference is not automatically a saving: most purchase VAT cannot be reclaimed. GOV.UK recommends speaking to an accountant or tax adviser about whether the scheme is right for you.

How flat rate VAT works

You still issue normal VAT invoices to VAT-registered customers, who treat them as normal VAT invoices. Your flat rate changes how you calculate the payment to HMRC, rather than the VAT charged on those invoices.

Flat rate payment = VAT-inclusive turnover × your flat rate. Include standard, reduced and zero-rated sales plus VAT, as well as exempt income such as rent. Notice 733 paragraph 6.2 explains what belongs in this turnover figure.

There are three turnover methods: basic, cash based (using when you are paid) and retailer's. Keep the chosen method for at least 12 months. The scheme has its own cash-based turnover method; you cannot combine it with the separate Cash Accounting Scheme.

Illustrative example A: management consultancy at 14%

A consultancy invoices £15,000 net in a quarter and charges £3,000 VAT at 20%. Its VAT-inclusive turnover is £18,000. At 14%, it pays HMRC £2,520 and keeps £480 of the VAT charged.

Under standard accounting it would pay £3,000 less its own input VAT. On these figures, standard accounting only wins if input VAT exceeds £480 in the quarter, before counting administration time. This is arithmetic for this illustration, not a result that applies to your business. During its first year of VAT registration, a 13% rate would give a payment of £2,340.

Keep the calculation with your VAT account: turnover, percentage used, tax due and spending on relevant goods. Our VAT return guide covers submitting a return.

Who can join, and who cannot?

You must be VAT registered and expect VAT taxable turnover of £150,000 or less, excluding VAT, in the next 12 months. VAT taxable turnover means everything you sell that is not VAT exempt. See our VAT registration threshold guide for the wider limits.

You cannot join if:

• You left the scheme in the last 12 months.
• You committed a VAT offence in the last 12 months, such as VAT evasion.
• You joined, or were eligible to join, a VAT group in the last 24 months.
• You registered as a business division in the last 24 months.
• Your business is closely associated with another business.
• You have joined a margin or capital goods VAT scheme.

Check the restrictions in Notice 733, section 3. Our VAT margin scheme guide explains that separate scheme; it cannot be used with the Flat Rate Scheme.

VAT flat rates by business type

Use the rate for your business activity unless the limited cost rule below applies. If your business has more than one activity, choose the one with the greater turnover and apply its rate to the whole business. Do not split turnover between percentages (Notice 733, paragraph 4.8).

*Labour-only building or construction services means the materials supplied are worth less than 10% of turnover for those services. Otherwise use the general building or construction category.

The catering, hotel and pub figures shown are the rates from 1 April 2022. Rates can change: check the live GOV.UK flat rates table before using a rate.

The limited cost business rule: when 16.5% applies

Test your spending on relevant goods, including VAT, for every return period. You use 16.5% if that spending is less than 2% of VAT flat rate turnover, or is more than 2% but less than £1,000 a year (£250 for a quarterly return). You can move between 16.5% and your sector rate as the test changes.

Relevant goods are goods bought for the business that fall within the rules in Notice 733 paragraphs 4.4 to 4.6. Count qualifying goods spending including VAT, rather than all business costs. The following do not count:

• Vehicle costs, including fuel, unless your business is in the transport sector.
• Food or drink for you or your staff.
• Capital expenditure goods.
• Goods for resale or hire, unless that is your main business activity.
• Promotional items, gifts and donations.
• Any services.

Illustrative example B: £200 of relevant goods

Using the same £18,000 quarterly VAT-inclusive turnover, 2% is £360. Spending £200 including VAT on relevant goods is below that figure, so the business uses 16.5% and pays £2,970.

For this illustration, the £200 spend includes £33.33 VAT. Standard accounting would mean £3,000 less £33.33, or £2,966.67, so the scheme costs £3.33 more. Notice 733 warns that a limited cost trader may pay more VAT than under standard accounting.

Illustrative example C: £400 of relevant goods

At the same turnover, £400 including VAT is above both £360 (2%) and the £250 quarterly amount. The consultancy therefore uses its 14% sector rate and pays £2,520. These examples illustrate the test; they do not determine the rate for your own business.

The first-year 1% discount

The discount reduces your flat rate by 1 percentage point during your first year as a VAT-registered business. It ends on the day before the first anniversary of VAT registration, not the anniversary of joining the Flat Rate Scheme (Notice 733, paragraph 4.7).

For example, 14% becomes 13% while the discount applies. Joining the scheme later does not start a new year of discount.

What can you reclaim?

You generally cannot reclaim VAT on purchases under the scheme. The exception is certain capital assets: a single purchase of capital expenditure goods costing £2,000 or more including VAT can qualify. Claim the qualifying VAT in box 4 outside the scheme, following Notice 733 paragraph 15.2.

The exception is for qualifying capital expenditure goods. Check the conditions before treating a purchase as reclaimable.

How to join the Flat Rate Scheme

If you are not yet VAT registered, you can register and apply to join at the same time. Our guide to registering for VAT covers registration.

If you are already registered, apply online or by post using the routes in GOV.UK's joining guidance. Confirmation arrives in your VAT online account or by post.

An authorised accountant can deal with HMRC for you.

Joining the Annual Accounting Scheme is a separate step.

When you must leave, and how to leave

You must leave if you are no longer eligible on the anniversary of joining. You must also leave if turnover in the last 12 months was over £230,000 including VAT, or you expect it to exceed that amount in the next 12 months, or if you expect total income in the next 30 days alone to exceed £230,000 including VAT.

Notice 733 paragraph 3.5 says you may remain if HMRC is satisfied your income in the next 12 months will not exceed £191,500. This requires HMRC's agreement; it is not an automatic allowance to stay.

You can leave voluntarily at any time, but must wait 12 months before rejoining. Contact HMRC with your name, signature, VAT number, business name and address. HMRC confirms the leaving date. Follow the official leaving guidance and Notice 733 section 12 for the applicable date.

Is the Flat Rate Scheme worth it?

This is a numbers question. Compare the payment under your applicable flat rate with sales VAT less reclaimable input VAT under standard accounting. Include the limited cost test, any remaining first-year discount, qualifying capital purchases and the time needed to keep records.

Review the comparison as turnover and spending change. A result from one quarter is not a promise of future savings. This decision guidance is general; ask an accountant to check the calculation against your circumstances.

Check the current rules

Rates and limits can change. Check GOV.UK's Flat Rate Scheme guide and VAT Notice 733 before acting. RR Accountants is not HMRC.