What Is Flat Rate VAT in the UK?

byDaniel Greenaway/10th February 2025/inRunning a business, Tax

key accounting dates for UK businesses in January 2025 Hero Image

Get 50% off our services for the first 6 months when you sign up to one of our Pre-Built or Bespoke Packages!

The UK’s VAT system can be complex, especially for small businesses juggling multiple tasks. To simplify VAT reporting, HMRC offers the Flat Rate VAT Scheme, which is designed to make life easier for smaller businesses by reducing administrative burden.

But what exactly is Flat Rate VAT, and how does it differ from standard VAT? In this guide, we’ll explain how it works, who qualifies, and whether it might be right for your business.

How Does Flat Rate VAT Work?

Under the Flat Rate VAT Scheme, businesses charge VAT at the standard rate (currently 20%) to their customers. However, instead of calculating VAT based on the difference between VAT on sales and purchases, you pay a fixed percentage of your gross turnover (sales including VAT) to HMRC.

Flat Rate Percentage: This varies by industry and is typically lower than the standard VAT rate.
No Need to Track Input VAT: Unlike the standard VAT scheme, you don’t need to calculate VAT on individual purchases.

Example:
If your business turnover is £10,000 (including VAT) and your flat rate percentage is 12%, you pay £1,200 (12% of £10,000) to HMRC, regardless of how much VAT you’ve paid on purchases.

Who Can Join the Flat Rate VAT Scheme?

The scheme may available to small businesses if:

you’re a VAT-registered business
you expect your VAT taxable turnover to be £150,000 or less (excluding VAT) in the next 12 months

Businesses must leave the scheme if turnover exceeds £230,000 (including VAT) in a 12-month period.

You cannot join the scheme if:

you left the scheme in the last 12 months
you committed a VAT offence in the last 12 months, for example VAT evasion
you joined (or were eligible to join) a VAT group in the last 24 months
you registered for VAT as a business division in the last 24 months
your business is closely associated with another business
you’ve joined a margin or capital goods VAT scheme

You cannot use the Cash Accounting Scheme with the Flat Rate Scheme. However, the Flat Rate Scheme has its own cash-based method for calculating turnover.

Flat Rate VAT Percentages

The flat rate percentage depends on your business sector. For example:

Retail (not food, confectionery, or clothing): 7.5%
Catering Services (e.g., restaurants, pubs): 12.5%
IT Consultancy and Design: 14.5%

HMRC provides a comprehensive list of flat rate percentages for all industries.

We provide VAT returns and Accountancy Services for companies across the UK

VAT Return Services

Get 50% off our services for the first 6 months when you sign up to one of our Pre-Built or Bespoke Packages!

The Limited Cost Trader Rule

Businesses classified as limited cost traders (spending less than 2% of turnover or £1,000 per year on goods) must use a flat rate of 16.5%, regardless of their industry.

This rule ensures that businesses with minimal input VAT to reclaim don’t gain an unfair advantage.

Advantages of Flat Rate VAT

Simplified Administration: No need to track and report VAT on every purchase.
Predictable Payments: A fixed percentage makes it easier to estimate VAT liabilities.
Potential Financial Benefit: Some businesses pay less VAT overall, especially those with low VAT costs.

Disadvantages of Flat Rate VAT

Limited VAT Recovery: You can’t reclaim VAT on most purchases (exceptions apply for capital assets over £2,000).
May Not Suit High-Cost Businesses: Businesses with significant VAT-exempt supplies or high input VAT costs may benefit more from the standard VAT scheme.

Is Flat Rate VAT Right for Your Business?

The Flat Rate VAT Scheme is ideal for small businesses with low VATable costs and those seeking simplicity in VAT reporting. However, it’s essential to calculate whether this scheme benefits your business financially compared to the standard scheme.

How to Apply

To join the scheme:

Register for VAT (if you haven’t already).
Complete the Flat Rate VAT Scheme application (VAT600FRS) via HMRC’s website.

How to leave the flat rate vat scheme

To leave the scheme, contact HMRC with the following information:

your name
your signature
your VAT number
your business name and address

HMRC will then confirm your leaving date.

Key Takeaways

The Flat Rate VAT Scheme simplifies VAT reporting by using a fixed percentage of your turnover.
It’s available to businesses with an annual turnover of £150,000 or less (excluding VAT).
Carefully assess your business’s costs and turnover to decide if this scheme is beneficial.

At Accounting Wise, we help small businesses in the UK understand and optimise their VAT schemes. Whether you’re new to VAT or considering switching to the Flat Rate Scheme, we’re here to provide expert guidance.

Confused about VAT? Contact Accounting Wise today for tailored advice on the best VAT scheme for your business.

Build Your Own Package Accounting Packages One Off Pricing