The Flat Rate VAT Scheme is designed to simplify VAT for small businesses in the UK.
Instead of calculating VAT on every transaction, businesses pay a fixed percentage of their turnover to HMRC. This guide explains how the scheme works, who can use it, and whether it is right for your business.
The Flat Rate VAT Scheme is a simplified method of calculating VAT for small businesses in the UK.
Instead of calculating VAT on every transaction, you pay a fixed percentage of your turnover to HMRC.
Under the Flat Rate VAT Scheme:
You charge VAT to customers at the normal rate
You pay a fixed percentage of your gross turnover to HMRC
You usually cannot reclaim VAT on most purchases
What is the Flat Rate VAT Scheme?
The Flat Rate VAT Scheme allows businesses to pay VAT as a fixed percentage of their gross turnover.
Instead of calculating VAT on every sale and purchase, you apply a flat rate set by HMRC based on your industry.
You still charge customers the standard VAT rate (usually 20%), but you pay HMRC a lower fixed percentage.
Who Can Use the Flat Rate VAT Scheme?
You can join the Flat Rate VAT Scheme if your business is VAT registered and your annual turnover is £150,000 or less (excluding VAT).
You must also leave the scheme if your total business income exceeds £230,000, including VAT.
You can use the Flat Rate VAT Scheme if:
Your business turnover is £150,000 or less (excluding VAT)
Different business types have different flat rate percentages.
Example:
You invoice £1,000 + VAT (£200) = £1,200 total
Under the flat rate scheme (e.g. 12%):
You pay £144 to HMRC
You keep the difference instead of calculating VAT normally
Advantages:
Simplified VAT calculations
Less admin
Disadvantages:
Limited ability to reclaim VAT
May not be beneficial for all businesses
How Does the Flat Rate VAT Scheme Work?
Under the scheme, you:
- Charge VAT to customers as normal
- Keep the difference between what you charge and what you pay HMRC
- Apply a fixed flat-rate percentage to your total turnover
The flat rate percentage depends on your business type.
How to Calculate VAT Using the Flat Rate Scheme
To calculate VAT under the Flat Rate Scheme:
- Work out your total turnover, including VAT
- Apply your flat rate percentage
- Pay that amount to HMRC
Example:
If your turnover is £1,000 (including VAT) and your flat rate is 12%:
£1,000 × 12% = £120 payable to HMRC
Tip: Always confirm your correct flat rate percentage with HMRC, as using the wrong rate can lead to incorrect VAT payments.
Flat Rate VAT Percentages
Flat rate percentages vary depending on your industry.
For example:
- IT consultants: around 14.5%
- Builders: around 9.5%
- Retailers: around 7.5%
You should check the latest HMRC rates for your specific business category.
Advantages of the Flat Rate VAT Scheme
The scheme offers several benefits:
- Simpler VAT calculations
- Less admin work
- Potential to keep a portion of VAT charged
It is particularly useful for small businesses with low expenses.
Disadvantages of the Flat Rate VAT Scheme
There are also some drawbacks:
- You cannot reclaim VAT on most purchases
- It may not be cost-effective for all businesses
- You must still track turnover accurately
It is important to compare this scheme with standard VAT accounting.
How This Affects Your VAT Calculations
Even under the Flat Rate Scheme, understanding how VAT works is important.
You can learn how to calculate VAT or remove VAT using our step-by-step guides.
Use a VAT Calculator for accuracy.
If you need to work out VAT figures before applying your flat rate, a calculator can save time.
Use our VAT calculator to quickly calculate VAT on your sales and better understand your turnover.
Flat Rate VAT Scheme FAQs
Is the Flat Rate VAT Scheme worth it?
It depends on your business expenses and industry. Some businesses benefit, while others may pay more VAT.
Can I leave the Flat Rate VAT Scheme?
Yes, you can leave at any time or if your turnover exceeds the threshold.
Do I still charge 20% VAT to customers?
Yes, you charge standard VAT rates but pay HMRC using your flat rate percentage.
You may also find these helpful:
VAT Calculator UK
VAT Registration UK
VAT Return UK
These guides help you understand VAT schemes and calculations.
Disclaimer
This guide is for general information only. While every effort is made to ensure accuracy, we are an independent resource and not affiliated with HMRC. Always consult a qualified professional for financial decisions.