Flat Rate Scheme
A simplified VAT accounting method for small businesses with an annual turnover below £150,000, where you pay a fixed percentage of your gross turnover to HMRC instead of accounting for input and output VAT separately. The fixed percentage varies by trade sector, typically ranging from 4% to 16.5%. Businesses can sometimes keep the difference between the VAT they charge customers and the flat rate percentage they pay to HMRC.
How it works
Instead of tracking VAT charged on every sale and VAT paid on every purchase separately, the Flat Rate Scheme has you apply a single fixed percentage to your total VAT-inclusive turnover and pay that amount to HMRC. You still issue invoices showing standard VAT to your customers as normal — the simplification is entirely in how you calculate what you owe HMRC, not in how you charge customers.
Because the flat rate percentage is set below the amount of VAT most businesses actually charge, businesses with few VAT-bearing purchases, typical of many service-based businesses, can end up keeping some of the difference as extra profit, which is the main appeal of the scheme. Businesses that buy a lot of VAT-rated stock or equipment often do worse under the Flat Rate Scheme than under standard VAT accounting, because they can't separately reclaim input VAT on those purchases in the normal way.
The top of the flat rate range — 16.5% — is generally known as the limited cost business rate, applying to businesses that spend very little on goods relative to their turnover, and it exists specifically to reduce the benefit of the scheme for businesses with almost nothing to reclaim VAT on. You can switch back to standard VAT accounting at the start of any VAT return period if the scheme stops working in your favour.
Example: Flat Rate Scheme versus standard VAT
Suppose your business has net sales of £80,000 and you charge standard-rate VAT at 20% on top, giving VAT-inclusive turnover of £80,000 + £16,000 = £96,000. Say your sector's flat rate is 12%.
Under the Flat Rate Scheme, you pay HMRC 12% of £96,000 = £11,520. You charged customers £16,000 in VAT, so you keep £16,000 − £11,520 = £4,480 as extra margin, without separately tracking input VAT on your purchases.
Frequently asked questions
Can I still reclaim VAT on purchases under the Flat Rate Scheme?
Generally no — the flat rate percentage is designed to already account for input VAT, so you can't separately reclaim VAT on most purchases, with a narrow exception for certain capital assets over a set value.
Is the Flat Rate Scheme always cheaper than standard VAT accounting?
No — it tends to suit service businesses with low VAT-bearing costs, but businesses that buy a lot of VAT-rated stock or equipment often pay more overall than they would under standard VAT accounting.
Do I still charge customers standard VAT under the Flat Rate Scheme?
Yes — your invoices show VAT in the normal way; the Flat Rate Scheme only changes how you calculate what you hand over to HMRC, not what you charge customers.
Related Terms
Value Added Tax
A consumption tax charged at each stage of production and distribution on goods and services, with the final burden falling on the end consumer.
VAT Registration Threshold
The level of taxable turnover above which businesses must register for VAT, currently £90,000 per rolling 12-month period.
VAT Return
A periodic report that VAT-registered businesses must submit to HMRC, typically quarterly, showing the VAT they have charged customers and the VAT they have paid on purchases.
Standard Rate VAT
The main VAT rate of 20% applied to most goods and services sold in the UK by VAT-registered businesses.
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