The Flat Rate Scheme is a simplified way for a small business to account for VAT: you charge customers VAT as normal, but instead of working out the VAT on every sale and purchase you pay HMRC a fixed percentage of your VAT-inclusive turnover, set by your trade sector. In return you give up reclaiming VAT on almost everything you buy.
- Joining limit, expected turnover
- £150,000
- Must leave when income passes
- £230,000
- First-year discount
- 1%
- Limited cost business rate
- 16.5%
Who can join and when you must leave
You can apply if you are VAT registered and expect your VAT-taxable turnover in the next 12 months to be £150,000 or less, excluding VAT. You do not need to be over the £90,000 registration threshold: a smaller business can register voluntarily and then join. The full conditions are on GOV.UK.
You must leave when your total business income, including VAT, goes over £230,000 in a year, or when you expect it to in the next 30 days alone. Once out, you cannot rejoin within 12 months.
How it works, with a worked example
You still add VAT at the normal rate, usually the 20% standard rate, to every invoice, so your customers see nothing different. What changes is what you pay HMRC. Take an IT consultant, whose sector rate is 14.5%.
- Invoice as normal. A £500 job carries £100 of VAT at 20%, so the customer pays £600 (the net figure multiplied by 1.20).
- Apply the flat rate to the gross figure. The percentage goes on the VAT-inclusive £600, not the £500 net. 14.5% of £600 is £87.
- Pay HMRC the result. You collected £100 and pay over £87, so £13 stays in the business to cover the VAT on your own costs, which you cannot reclaim.
The sector percentages are set to allow for the purchase VAT you no longer reclaim.
The first-year discount
In your first year as a VAT-registered business you take 1% off your sector rate, so the consultant above would pay 13.5% of £600, which is £81, and keep £19. The year runs from your VAT registration date, not the date you joined the scheme.
The limited cost business trap
This catches many service businesses, including consultants and contractors, whose main cost is their own time. At 16.5% the consultant above would pay £99 of the £100 collected and keep £1, while still unable to reclaim VAT on costs, which often removes the benefit of the scheme.
What you cannot reclaim
On the scheme you do not normally reclaim VAT on purchases. The main exception is a single purchase of capital assets costing £2,000 or more including VAT, on which you reclaim the VAT in the normal way. Other purchases are covered by the flat rate percentage and nothing more.
Sector percentages
These are some of the rates from HMRC's list in VAT Notice 733. The flat rate VAT calculator carries the full table and applies your rate to any invoice. Confirm your sector percentage with HMRC or your accountant.
| Business type | Flat rate |
|---|---|
| Retailing food | 4% |
| Pubs | 6.5% |
| Building services including materials | 9.5% |
| Hotels or accommodation | 10.5% |
| Advertising | 11% |
| Catering services | 12.5% |
| Hairdressing | 13% |
| Management consultancy | 14% |
| Accountancy | 14.5% |
| IT consultancy | 14.5% |
| Labour-only building services | 14.5% |
| Limited cost business, any sector | 16.5% |
Is it worth it?
The scheme pays when the VAT you keep is more than the VAT you would have reclaimed under normal accounting, and it cuts record keeping either way. It suits businesses that sell standard-rated services and pay little VAT on their costs, provided their spending on goods is still enough to pass the limited cost test. It rarely suits businesses that buy a lot of stock or materials, because they lose more reclaimable VAT than the lower rate gives back. Run a quarter's figures both ways before you decide, and remember that leaving locks you out for 12 months.
Frequently asked questions
Do I still charge my customers 20% VAT?
Yes, at whatever rate applies to the sale, usually 20%. You issue normal VAT invoices, and the flat rate only changes how much of that VAT you pay to HMRC.
Do I still file VAT returns on the scheme?
Yes. Returns are usually quarterly, and the return and payment are due 1 calendar month and 7 days after the end of the VAT period, filed through Making Tax Digital compatible software.
Can I reclaim VAT on a big purchase?
Not normally. The main exception is a single purchase of capital assets costing £2,000 or more including VAT.
What happens if my turnover passes £150,000 after I join?
Nothing. The £150,000 figure is only the test for joining. Once you are in, the figure that matters is £230,000 of total income including VAT.
Last reviewed September 2026.
