VAT flat rate scheme explained | Figures Chartered Accountants

If you are VAT registered in the UK, you usually account for VAT on the standard scheme: you report the VAT you charge (outputs) and the VAT you pay (inputs), and pay or reclaim the difference. The flat rate scheme is an alternative that can simplify your returns and sometimes reduce your net VAT bill. This article explains the VAT flat rate scheme for UK small businesses: how it works, who it suits, and how to decide if it is right for you.

We cover the mechanics of the scheme, the flat rate percentages by sector, and the pros and cons versus the standard scheme. This is for VAT-registered small businesses in the UK that are considering or already using the flat rate scheme.

What is the VAT flat rate scheme?

Under the flat rate scheme, you pay HMRC a fixed percentage of your turnover (including VAT). You do not work out output VAT and input VAT separately; you apply the percentage to your VAT-inclusive turnover and pay that amount. In return, you generally cannot reclaim VAT on purchases (except on certain capital purchases over £2,000 including VAT). The percentage depends on your trade; HMRC publish a list of business types and their rates. For more on VAT and which scheme to use, see our Statutory Accounts & Tax service.

How the flat rate percentage works

You take your turnover for the period (including VAT), multiply by your flat rate percentage, and that is the VAT you pay. For example, if your turnover including VAT is £120,000 in a quarter and your flat rate is 12%, you pay £14,400 for the quarter. You do not reclaim input VAT on normal purchases. The scheme is designed to simplify admin and, for businesses with few reclaimable inputs, can result in a lower net VAT cost than the standard scheme. GOV.UK flat rate scheme has the full rules and sector list.

Who can use the flat rate scheme?

You can join if your taxable turnover (excluding VAT) is £150,000 or less in the next 12 months. Once in the scheme, you must leave if your turnover in the last 12 months goes over £230,000 (including VAT), or if you expect it to in the next 12 months. You also cannot join if you have left the scheme in the last 12 months, or if you are in the cash accounting scheme and want to use the flat rate scheme in a way that conflicts with the rules. There are other conditions; your accountant can check eligibility.

Flat rate vs standard scheme: when does flat rate help?

Flat rate tends to suit businesses that:

Have few VATable purchases (so there is little input VAT to reclaim anyway).
Want simpler returns (one percentage applied to turnover).
Operate in a sector where the flat rate is lower than the effective rate they would pay on the standard scheme.

It tends to be less attractive when:

You have high VATable costs (e.g. materials, equipment) and would reclaim a lot on the standard scheme.
Your sector flat rate is high relative to your actual margin.

A quick comparison: work out what you would pay on the standard scheme (output VAT minus input VAT) versus flat rate (percentage of turnover) for a typical period. That will tell you which is better for you. We can run this for clients as part of VAT and tax support.

The 1% first year discount

If you are in your first year of VAT registration, you get a 1% discount on the flat rate percentage (so 11% instead of 12%, for example). That makes the scheme more attractive for new registrations. The discount applies only in the first year.

UK tax and legal accuracy

The flat rate scheme is set out in VAT legislation and HMRC guidance. Rates and thresholds can change. The information here reflects the position for 2024/25 and 2025/26. This article is for informational purposes only and does not constitute professional tax or financial advice. Please speak to a qualified accountant before joining or leaving the scheme.

Frequently asked questions

Can I reclaim VAT on anything on the flat rate scheme?

You can reclaim VAT on capital purchases of £2,000 or more (including VAT) in a single purchase (e.g. a machine or a vehicle used only for business). You cannot reclaim VAT on normal day-to-day purchases.

What is my flat rate percentage?

HMRC publish a list of business types and their percentages. Your trade determines which percentage you use. If your business fits more than one category, you use the one that best describes your main activity.

Can I switch back to the standard scheme?

Yes. You can leave the flat rate scheme and return to the standard scheme. You must leave if your turnover exceeds the limit. There are rules on when you can rejoin the flat rate scheme after leaving.

Does the flat rate scheme affect my accounts?

Yes. You account for VAT differently: you record the flat rate amount you pay to HMRC rather than output and input VAT separately. Your accountant will reflect this in your accounts and returns.

What if I have zero-rated or exempt sales?

The flat rate scheme applies to your total turnover including VAT. Some businesses with mixed supplies have to leave the scheme or use a different calculation. Your accountant can advise based on your mix of sales.

Summary and next steps

The VAT flat rate scheme lets you pay a fixed percentage of your turnover to HMRC and generally not reclaim input VAT. It can simplify returns and sometimes reduce net VAT cost for businesses with few reclaimable inputs. Check your sector rate, compare to the standard scheme, and consider the first year discount if you have just registered.

If you would like help deciding between the flat rate and standard scheme, or with VAT returns, we would be glad to help. At Figures Chartered Accountants we work with UK businesses on VAT and tax. You can book a discovery call or look at our Statutory Accounts & Tax service.