The VAT Flat Rate Scheme lets a small business pay HMRC a fixed percentage of its VAT-inclusive turnover instead of accounting for VAT on every sale and purchase separately. You still charge your customers VAT at the normal rate — usually 20% — but you hand over a smaller, sector-based percentage and keep the difference. In exchange you give up the right to reclaim VAT on most purchases. You can join if your VAT turnover, excluding VAT, is £150,000 or less. The scheme was designed to cut bookkeeping for small businesses, and for some it still does. But since the limited cost business rules arrived, most service companies with low goods spend — consultants, contractors, agencies, and a good share of one-person limited companies — land on a 16.5% rate that makes the scheme worse than standard VAT accounting rather than better. Whether it is worth it is arithmetic, and it is worth redoing every year.
Thresholds and rates below are from gov.uk and VAT Notice 733, verified on 13 August 2026. Sector flat rates change and are not reproduced here — check the notice for your trade before you rely on a figure.
How does the Flat Rate Scheme work?
Three things happen at once, and it is the third that surprises people.
You charge customers VAT exactly as normal, at the standard rate for what you sell.
You pay HMRC a flat percentage of your gross, VAT-inclusive turnover — not of your VAT.
You cannot reclaim VAT on purchases, except capital assets costing £2,000 or more including VAT, bought in one transaction.
That second point is the one that catches people. The flat rate applies to the whole VAT-inclusive figure, so 14.5% of £120,000 gross is not 14.5% of the £20,000 VAT — it is £17,400. The comparison that matters is between that number and what you would have paid under standard accounting.
There is also a 1% discount on your flat rate for your first year of VAT registration, which runs from your registration date rather than from the date you join the scheme.
Is the Flat Rate Scheme worth it?
Only if your VAT-able costs are small relative to your sales — and if you are not a limited cost business.
Here is the shape of the comparison for a company with £120,000 gross turnover (£100,000 net plus £20,000 VAT):
Standard VAT accounting
Flat Rate at an illustrative 14.5%
Flat Rate at 16.5%
VAT charged to customers
£20,000
£20,000
£20,000
VAT reclaimed on purchases
Depends on spend
£0 (bar capital assets ≥£2,000)
£0
Paid to HMRC
£20,000 less reclaims
£17,400
£19,800
Kept
Your reclaims
£2,600
£200
At 14.5% the scheme is worth having if you reclaim less than £2,600 of VAT a year. At 16.5% you keep £200 on £120,000 of turnover — before you count the cost of not being able to reclaim VAT on anything you buy. For almost any real business that is a loss, not a saving.
The rate in the third column is not a sector rate. It is the limited cost business rate, and it is the reason most service companies should recheck this.
A limited cost business is one whose spend on goods is low compared with its turnover. VAT Notice 733 sets the test with both a percentage-of-turnover limb and a cash floor, applied for each VAT period rather than once when you join. If you fail it, your flat rate for that period is 16.5%, whatever your sector rate would otherwise have been.
The word doing the work is goods. The test counts physical goods used in the business. It excludes:
services of any kind — accountancy, software subscriptions, advertising, subcontractors, rent;
capital items such as computers and equipment;
food and drink for you or your staff;
vehicles, vehicle parts and fuel, unless you run a transport business.
For a consultancy, a design agency or a contractor working through a limited company, almost every cost is a service. That is the whole point of the rule, and it means a business can pass the test in a quarter it buys stock and fail it in the next.
You must check the test every VAT period. It is not a status you are assigned once.
When do you have to leave the scheme?
You must leave if your turnover reaches £230,000 including VAT — tested two ways:
on the anniversary of joining, looking back at the previous 12 months; and
on a forward look, if you expect your VAT-inclusive turnover in the next 30 days alone to exceed the limit.
You can also leave voluntarily at any time by writing to HMRC, and this is the more common reason. If the limited cost rules have pushed you to 16.5%, or your purchases have grown, standard accounting will usually be cheaper. Leaving takes effect from the date HMRC confirms, and you cannot rejoin the scheme for 12 months afterwards — so it is a decision to make on a full year's figures, not one quarter's.
If you are not yet registered at all and are trying to work out when you must be, that is a different question with a different threshold — we cover it in when a limited company registers for VAT. And if your turnover has fallen far enough that you are wondering whether to come off VAT altogether, see how to deregister for VAT.
Apply online through your VAT account, or by post on form VAT600FRS. You choose the sector that best fits your main business activity, and you keep that rate until your activity changes.
You cannot join if you left the scheme in the last 12 months, if you have committed a VAT offence in the last 12 months, or if your business is closely associated with another. The sector choice is yours to make honestly — HMRC does not pre-approve it, which means it is also yours to defend if asked, so record why you picked it.
Whichever way the arithmetic falls, the flat rate scheme is a simplification, not a tax saving in itself. Treat it as one line in the wider cost of running the company — our breakdown of what it actually costs to run a limited company puts it in context.
How does the flat rate VAT scheme work?
You charge customers VAT at the normal rate but pay HMRC a fixed percentage of your VAT-inclusive turnover instead, and you give up the right to reclaim VAT on purchases apart from capital assets costing £2,000 or more in a single transaction.
Is the flat rate VAT scheme worth it?
It is worth it only if the VAT you would otherwise reclaim is less than the amount the flat rate saves you. If you are a limited cost business paying 16.5%, it almost never is, because you keep very little and still cannot reclaim anything.
What are the disadvantages of flat rate VAT?
You cannot reclaim VAT on purchases, the 16.5% limited cost rate wipes out the benefit for most service businesses, you must retest the limited cost rules every VAT period, and once you leave you cannot rejoin for 12 months.
What is the turnover limit for the VAT Flat Rate Scheme?
You can join if your VAT turnover excluding VAT is £150,000 or less. You must leave once your VAT-inclusive turnover reaches £230,000, tested on the anniversary of joining and on a forward look at the next 30 days.
Can I reclaim VAT on the Flat Rate Scheme?
Only on capital assets costing £2,000 or more including VAT and bought in a single transaction. Everyday purchases, including services and software, cannot be reclaimed.
The VAT Flat Rate Scheme lets a small business pay HMRC a fixed percentage of its VAT-inclusive turnover instead of accounting for VAT on every sale and purchase separately. You still charge your customers VAT at the normal rate — usually 20% — but you hand over a smaller, sector-based percentage and keep the difference. In exchange you give up the right to reclaim VAT on most purchases. You can join if your VAT turnover, excluding VAT, is £150,000 or less. The scheme was designed to cut bookkeeping for small businesses, and for some it still does. But since the limited cost business rules arrived, most service companies with low goods spend — consultants, contractors, agencies, and a good share of one-person limited companies — land on a 16.5% rate that makes the scheme worse than standard VAT accounting rather than better. Whether it is worth it is arithmetic, and it is worth redoing every year.
Thresholds and rates below are from gov.uk and VAT Notice 733, verified on 13 August 2026. Sector flat rates change and are not reproduced here — check the notice for your trade before you rely on a figure.
How does the Flat Rate Scheme work?
Three things happen at once, and it is the third that surprises people.
You charge customers VAT exactly as normal, at the standard rate for what you sell.
You pay HMRC a flat percentage of your gross, VAT-inclusive turnover — not of your VAT.
You cannot reclaim VAT on purchases, except capital assets costing £2,000 or more including VAT, bought in one transaction.
That second point is the one that catches people. The flat rate applies to the whole VAT-inclusive figure, so 14.5% of £120,000 gross is not 14.5% of the £20,000 VAT — it is £17,400. The comparison that matters is between that number and what you would have paid under standard accounting.
There is also a 1% discount on your flat rate for your first year of VAT registration, which runs from your registration date rather than from the date you join the scheme.
Is the Flat Rate Scheme worth it?
Only if your VAT-able costs are small relative to your sales — and if you are not a limited cost business.
Here is the shape of the comparison for a company with £120,000 gross turnover (£100,000 net plus £20,000 VAT):
Standard VAT accounting
Flat Rate at an illustrative 14.5%
Flat Rate at 16.5%
VAT charged to customers
£20,000
£20,000
£20,000
VAT reclaimed on purchases
Depends on spend
£0 (bar capital assets ≥£2,000)
£0
Paid to HMRC
£20,000 less reclaims
£17,400
£19,800
Kept
Your reclaims
£2,600
£200
At 14.5% the scheme is worth having if you reclaim less than £2,600 of VAT a year. At 16.5% you keep £200 on £120,000 of turnover — before you count the cost of not being able to reclaim VAT on anything you buy. For almost any real business that is a loss, not a saving.
The rate in the third column is not a sector rate. It is the limited cost business rate, and it is the reason most service companies should recheck this.
A limited cost business is one whose spend on goods is low compared with its turnover. VAT Notice 733 sets the test with both a percentage-of-turnover limb and a cash floor, applied for each VAT period rather than once when you join. If you fail it, your flat rate for that period is 16.5%, whatever your sector rate would otherwise have been.
The word doing the work is goods. The test counts physical goods used in the business. It excludes:
services of any kind — accountancy, software subscriptions, advertising, subcontractors, rent;
capital items such as computers and equipment;
food and drink for you or your staff;
vehicles, vehicle parts and fuel, unless you run a transport business.
For a consultancy, a design agency or a contractor working through a limited company, almost every cost is a service. That is the whole point of the rule, and it means a business can pass the test in a quarter it buys stock and fail it in the next.
You must check the test every VAT period. It is not a status you are assigned once.
When do you have to leave the scheme?
You must leave if your turnover reaches £230,000 including VAT — tested two ways:
on the anniversary of joining, looking back at the previous 12 months; and
on a forward look, if you expect your VAT-inclusive turnover in the next 30 days alone to exceed the limit.
You can also leave voluntarily at any time by writing to HMRC, and this is the more common reason. If the limited cost rules have pushed you to 16.5%, or your purchases have grown, standard accounting will usually be cheaper. Leaving takes effect from the date HMRC confirms, and you cannot rejoin the scheme for 12 months afterwards — so it is a decision to make on a full year's figures, not one quarter's.
If you are not yet registered at all and are trying to work out when you must be, that is a different question with a different threshold — we cover it in when a limited company registers for VAT. And if your turnover has fallen far enough that you are wondering whether to come off VAT altogether, see how to deregister for VAT.
Apply online through your VAT account, or by post on form VAT600FRS. You choose the sector that best fits your main business activity, and you keep that rate until your activity changes.
You cannot join if you left the scheme in the last 12 months, if you have committed a VAT offence in the last 12 months, or if your business is closely associated with another. The sector choice is yours to make honestly — HMRC does not pre-approve it, which means it is also yours to defend if asked, so record why you picked it.
Whichever way the arithmetic falls, the flat rate scheme is a simplification, not a tax saving in itself. Treat it as one line in the wider cost of running the company — our breakdown of what it actually costs to run a limited company puts it in context.
How does the flat rate VAT scheme work?
You charge customers VAT at the normal rate but pay HMRC a fixed percentage of your VAT-inclusive turnover instead, and you give up the right to reclaim VAT on purchases apart from capital assets costing £2,000 or more in a single transaction.
Is the flat rate VAT scheme worth it?
It is worth it only if the VAT you would otherwise reclaim is less than the amount the flat rate saves you. If you are a limited cost business paying 16.5%, it almost never is, because you keep very little and still cannot reclaim anything.
What are the disadvantages of flat rate VAT?
You cannot reclaim VAT on purchases, the 16.5% limited cost rate wipes out the benefit for most service businesses, you must retest the limited cost rules every VAT period, and once you leave you cannot rejoin for 12 months.
What is the turnover limit for the VAT Flat Rate Scheme?
You can join if your VAT turnover excluding VAT is £150,000 or less. You must leave once your VAT-inclusive turnover reaches £230,000, tested on the anniversary of joining and on a forward look at the next 30 days.
Can I reclaim VAT on the Flat Rate Scheme?
Only on capital assets costing £2,000 or more including VAT and bought in a single transaction. Everyday purchases, including services and software, cannot be reclaimed.
