Flat Rate VAT Scheme: Is It Worth It?
Looking for a simpler way to manage VAT? The Flat Rate Scheme can save time, but whether it saves money depends on your business.
Quick Answer:
The Flat Rate VAT Scheme can work well for some businesses, but it's not right for everyone. For some, it can mean less paperwork and potential savings. For others, it could result in paying more VAT overall. Before making a decision, it's important to understand how your business's turnover, expenses and industry affect the outcome.
What Is the Flat Rate VAT Scheme?
Rather than reclaiming VAT on most purchases, you pay HMRC a fixed percentage of your VAT-inclusive turnover.
Standard VAT
Sales VAT
-Purchase VAT
---------------------------
= VAT owed to HMRC
Flat Rate VAT
VAT-inclusive turnover
x Flat Rate %
---------------------------
= VAT owed to HMRC
✅ Simpler
✅ Less bookkeeping
✅ Easier forecasting
Example: Sarah's Hair Salon
Sales: £10,000
VAT charged to customers: £2,000
Total Received: £12,000
Flat rate % = 13%
VAT Calc: £12,000 x 13% = £1,560
Sarah pays HMRC £1,560 and keeps the remaining £440 VAT charged.
Why Businesses Like it...
Less admin
Less VAT tracking needed
Easier Forecasting
Predictable VAT payments
Potential Savings
Depending on business type
Easier Bookkeeping
Fewer calculations
needed
How to work out your Flat Rate %
HMRC assigns a flat rate percentage based on the type of business activity you carry out. Each trade sector has its own rate. For example, accountants and bookkeepers use 14.5%, management consultants use 14%, hairdressers use 13%, and many retailers use lower rates. See the link below for the full list:
You also get an additional 1% discount in your first year of VAT registration.
The Limited Cost Trader Problem
If your business spends very little on goods, HMRC may class you as a limited cost trader.
If this is the case, instead of using your industry's flat rate, you would have to use 16.5%. For many businesses, this removes most of the financial benefit of the flat rate scheme.
Follow this link to work out if you would be classed as a limited cost business:
Here's The Catch...
Under the VAT flat rate scheme, you can't reclaim most VAT on purchases.
This could be an issue if you regularly buy:
Stock
Tools & Equipment
Materials
However, you can reclaim VAT on assets purchased for use in the business if the purchase price is £2,000 or more, including VAT.
Key eligibility Criterea:
VAT taxable turnover must be £150K or less, excluding VAT
You must not have committed a VAT offence in the last 12 months
You must not also use the Cash Accounting Scheme
Is it worth it? Let's compare
Business A
Marketing Consultant
Low Overheads
Little VAT to reclaim
Simple expenses
Business B
Construction company
High material costs
Lots of VAT to reclaim
Equipment purchases
The Flat Rate scheme is best suited to businesses with relatively low business expenses, who would otherwise reclaim a very small amount of VAT.
📌 Our Verdict
The Flat Rate VAT Scheme has its place.
If your business has relatively low costs and you're looking for a simpler way to manage VAT, it may save both time and money. However, businesses with significant expenses often achieve better results using standard VAT accounting.
The best approach is to compare both methods using your actual figures, and see what the financial benefits may be.
Need Help Choosing?
Unsure which VAT scheme is right for your business?
👉 Speak to our team for a review of your turnover, expenses and VAT position, and we'll help you decide whether the Flat Rate VAT Scheme could work for you.
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