Managing VAT can feel overwhelming for many small business owners, freelancers, and contractors. The calculations, reclaiming process, and record-keeping often add unnecessary stress to running a business. That’s exactly why HMRC introduced the Flat Rate VAT Scheme to make VAT simpler, quicker, and more predictable.
Instead of juggling complex figures, this scheme allows you to pay a fixed percentage of your turnover, keep the difference between what you charge and what you owe HMRC, and focus more time on growing your business.
But is it the right choice for you? Let’s explore everything you need to know, from flat rate scheme eligibility and turnover limits to how the scheme actually works in practice.
What is the Flat Rate VAT Scheme?
The Flat Rate VAT Scheme is a simplified way for small businesses to manage VAT in the UK. Instead of working out the difference between the VAT you charge your customers (output VAT) and the VAT you pay on your purchases (input VAT), you simply pay HMRC a fixed percentage of your VAT-inclusive turnover.
This scheme was introduced by HMRC (Her Majesty’s Revenue and Customs) back in 2002 to reduce the administrative burden for small businesses and sole traders. Under the scheme:
- You charge VAT at the standard 20% rate to your customers.
- You pay HMRC a lower, fixed percentage of your total turnover.
- You keep the difference as additional profit.
- You cannot usually reclaim VAT on purchases (except for certain capital assets over £2,000).
In other words, it streamlines VAT into one straightforward calculation. That’s why it’s particularly attractive to freelancers, consultants, and service-based businesses that don’t have large costs.
How Does Flat Rate VAT Work?
So, how does flat rate VAT work in practice? Let’s break it down step by step:
1. You charge 20% VAT to your clients or customers as normal.
- Example: You invoice £1,000 for services + 20% VAT (£200) = £1,200 total.
2. You apply your industry’s flat rate VAT percentage (set by HMRC) to your VAT-inclusive turnover.
- If your industry rate is 12%, you would pay HMRC 12% of £1,200 = £144.
3. You keep the difference between what you charged (£200) and what you pay HMRC (£144).
- In this example, you keep £56 as additional income.
This system is designed to be predictable and easier to manage compared to the standard scheme, where you’d need to carefully calculate input VAT and output VAT.
💡 Special rule for limited cost businesses:
If your business spends less than 2% of your turnover on goods, or less than £1,000 annually (if 2% is more), you are classed as a “limited cost business.” In this case, you must use a higher flat rate of 16.5%, which can make the scheme less beneficial.
Flat Rate VAT Percentages by Industry
One of the most important aspects of the Flat Rate VAT Scheme is understanding which rate applies to your business. Instead of paying the standard 20% VAT to HMRC, you apply a flat rate percentage that’s set by HMRC based on your industry sector. These percentages are designed to reflect the typical level of input VAT costs in each sector.
This means businesses in industries with low input VAT (like consultancy) may pay a higher rate than those with high costs (like retail or hospitality). However, the flat rate is always lower than 20%, so there’s potential for savings depending on your type of business.
💡 Key points to remember:
- Your flat rate percentage is applied to your VAT-inclusive turnover (total sales including VAT).
- You’ll receive a 1% discount for your first year of VAT registration when using the scheme.
- If you’re classed as a limited cost business, you’ll need to use the higher rate of 16.5%, regardless of industry.
Here’s a table of some of the most common flat rate VAT percentages by industry:
| Type of Business | Flat Rate VAT % |
| Accountancy or bookkeeping | 14.5% |
| Advertising | 11% |
| Agricultural services | 11% |
| Business services not listed elsewhere | 12% |
| Catering services (restaurants & takeaways) – current | 12.5% |
| Computer & IT consultancy or data processing | 14.5% |
| Construction services (general building) | 9.5% |
| Construction services (labour-only) | 14.5% |
| Entertainment or journalism | 12.5% |
| Estate agency or property management | 12% |
| Hairdressing or other beauty services | 13% |
| Hotel or accommodation (current rate) | 10.5% |
| Management consultancy | 14% |
| Manufacturing (general) | 9.5% |
| Photography | 11% |
| Pubs (current rate) | 6.5% |
| Real estate activity (not listed elsewhere) | 14% |
| Repairing vehicles | 8.5% |
| Retailing food, confectionery, or children’s clothing | 4% |
| Retailing not listed elsewhere | 7.5% |
| Secretarial services | 13% |
| Transport or storage (including taxis, couriers etc.) | 10% |
| Veterinary medicine | 11% |
| Wholesaling food | 7.5% |
| Wholesaling not listed elsewhere | 8.5% |
Why do Flat Rate VAT Percentages Vary?
HMRC sets different flat rate scheme percentages based on how much VAT businesses in that industry typically pay on their purchases. For example:
- Retailers often buy large quantities of stock (with VAT added), so their flat rate is lower (as little as 4%).
- Consultants and service businesses usually have fewer purchases with VAT, so their flat rate is higher (around 14%).
- Pubs and hospitality businesses fall somewhere in between, with variable rates depending on government support periods.
This system is designed to be fair across industries while still keeping VAT management simple.
Flat Rate Scheme Eligibility
Not every business can use this scheme. To qualify, you must meet certain flat rate scheme eligibility criteria:
- You must be VAT-registered with HMRC.
- Your expected VAT taxable turnover must be £150,000 or less (excluding VAT) in the next 12 months.
You cannot join the scheme if:
- You left the scheme within the last 12 months.
- You committed a VAT offence in the previous 12 months.
- You are associated with another business.
- You use certain other VAT schemes (capital goods, margin scheme, or VAT group).
Once you’re in the scheme, you must monitor your turnover carefully. If your business grows beyond the threshold, you may need to exit.
Flat Rate Scheme Turnover Limit and Thresholds
Two key limits apply to the Flat Rate Scheme:
1. Joining Threshold: You can join if your VAT taxable turnover is £150,000 or less (excluding VAT).
Example: If your annual turnover excluding VAT is £120,000, you can apply.
2. Leaving Threshold: You must leave the scheme if your turnover exceeds £230,000 (including VAT) at any time.
Example: If your business invoices £240,000 in a 12-month rolling period, you can no longer use the scheme.
These thresholds are important because they ensure the scheme remains targeted at small businesses. Exceeding them means switching back to the standard VAT scheme, which involves more detailed VAT accounting.
How to Apply for Flat Rate Scheme?
If you meet the flat rate scheme eligibility requirements, joining is straightforward. Here’s how you can apply for flat rate scheme status with HMRC:
VAT Registration: You must already be registered for VAT. If you’re not, you’ll need to register before applying.
Application: You can apply:
- Online through your Government Gateway account.
- By completing and submitting the VAT484 form (used for changing VAT details).
Confirmation: HMRC will review your application and confirm in writing if you can join the scheme.
Keep a record of your application, as HMRC may request additional information about your turnover or business type before granting approval.
Benefits of the Flat Rate VAT Scheme
For many small businesses, the scheme can be highly attractive. Here are some of the biggest advantages:
Simplicity in Bookkeeping: The biggest selling point is simplicity. You don’t need to calculate input and output VAT separately, just apply one percentage to your turnover. This reduces admin work and the likelihood of mistakes.
Potential Cost Savings: Because the flat rate VAT percentages are usually lower than the standard 20%, you may end up paying less VAT overall. You also keep the difference between what you collect and what you pay HMRC.
1% Discount for New VAT Registrations: If you’ve just registered for VAT, you get an extra 1% discount for your first year in the scheme. This can be a useful financial boost in your early trading years.
Predictable VAT Bills: Your VAT liability becomes more predictable, as it’s based on a fixed percentage of turnover. This makes cash flow management and budgeting much easier.
Disadvantages of the Flat Rate VAT Scheme
The scheme isn’t perfect for every business. Here are the key drawbacks:
Limited VAT Reclaims: You cannot reclaim VAT on most business purchases, except for certain capital assets over £2,000. If you have high input VAT costs, the scheme may not save you money.
Higher Rates for Limited Cost Businesses: If your business qualifies as a limited cost business, you’ll have to pay the 16.5% rate, which can wipe out the potential benefits.
Unsuitable for Growing Businesses: Once your turnover exceeds the flat rate scheme threshold of £230,000 including VAT, you’ll have to leave. This can make the scheme less useful for fast-growing businesses.
Possible Overpayments: Some industries might find they pay more under the flat rate scheme compared to the standard scheme, particularly if they buy a lot of goods and services with VAT included.
Is the Flat Rate VAT Scheme Right for Your Business?
The decision to join depends on your business model.
✔️ The scheme often suits:
- Freelancers and contractors.
- Consultants and service-based businesses with low expenses.
- Small businesses looking for predictable VAT bills and easier admin.
❌ The scheme may not suit:
- Businesses with high input VAT costs (e.g., retailers with large stock purchases).
- Businesses close to the turnover threshold, as you may need to switch back soon.
- Limited cost traders who would pay the higher 16.5% rate.
If you’re unsure, it’s always worth comparing both schemes with real numbers for your business, or seeking advice from an accountant before deciding.
Bottom Line
The Flat Rate VAT Scheme is an HMRC initiative designed to make VAT simpler for small businesses. By paying a fixed percentage of turnover, it reduces admin work and can even save you money, depending on your expenses. However, it’s not the right fit for every business, especially those with high input VAT costs or those classed as limited cost traders.
If your business is small, service-based, and you value simplicity, the scheme could free up valuable time and resources to focus on growth. But before you apply for the flat rate scheme, it’s always wise to compare it against the standard VAT scheme or consult an accountant to make sure it works in your favour.
FAQs
Q1. What is the flat rate scheme turnover limit?
Ans: You can join the scheme if your VAT taxable turnover is £150,000 or less (excluding VAT) in the next 12 months.
Q2. What is the flat rate scheme threshold for leaving?
Ans: You must leave the scheme if your turnover exceeds £230,000, including VAT.
Q3. How does flat rate VAT work compared to standard VAT?
Ans: Under flat rate VAT, you pay HMRC a fixed percentage of turnover instead of offsetting input and output VAT. This is simpler but may not suit businesses with high costs.
Q4. What are the flat rate VAT percentages for my industry?
Ans: Rates vary depending on your business type, e.g, 14.5% for accountancy, 12.5% for catering, 6.5% for pubs, and 7.5% for general retailing.
Q5. Who can apply for the flat rate scheme with HMRC?
Ans: Any VAT-registered business with expected turnover under £150,000 (excluding VAT) can apply, provided they meet the eligibility rules.
Q6. What is flat rate scheme eligibility based on?
Ans: It’s based on turnover, VAT registration status, and whether your business is free from disqualifying factors such as recent VAT offences or scheme misuse.
