VAT Flat Rate Scheme vs Standard VAT: Which Is Better?

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Last updated 23 October 2026. Written by the Limited Company Accountant UK team, part of Accotax. Figures are for the 2026/27 tax year; always check GOV.UK for the latest rates.

Short answer: Under the VAT flat rate scheme you charge customers normal VAT but pay HMRC a fixed percentage of your VAT-inclusive turnover, and you cannot usually reclaim VAT on purchases. It suits businesses with few costs, such as consultants, but is poor value for companies with lots of VAT-able expenses or those caught by the limited cost trader rule.

Key facts

Eligibility	Expected VAT-taxable turnover under £150,000
Leave the scheme	When turnover exceeds £230,000
First-year discount	1% off your rate in the first year of VAT registration
Limited cost trader rate	16.5%
Standard VAT threshold	£90,000

How the flat rate scheme works

In the standard VAT system, you charge VAT on your sales, reclaim VAT on your purchases, and pay HMRC the difference. In the flat rate scheme, you still charge your customers 20% VAT on sales, but you pay HMRC a fixed percentage of your gross turnover, depending on your trade sector, and you do not reclaim input VAT on most purchases.

The scheme is designed to cut paperwork. You do not need to track the VAT on every purchase. It can also leave you better off, if the flat rate percentage is lower than the VAT you would have paid under the normal scheme.

Who can join

You can join the scheme if you expect your VAT-taxable turnover, excluding VAT, to be £150,000 or less in the next 12 months. You must leave when your total turnover goes above £230,000. Certain businesses, such as those that are part of a group of companies under specific conditions, cannot use it.

A company must apply to HMRC, which can be done online when registering for VAT or later, and you can leave the scheme at any time. Whether to join is a financial decision that you should review every year.

The percentages

Each trade sector has a set percentage. For many consultancies, rates sit between 10% and 14.5%, while retail rates are about 7.5% to 12%. The first-year discount reduces your percentage by 1 point in the first year after VAT registration.

Check your sector percentage on GOV.UK, and make sure you choose the right category. If you carry out more than one type of business, use the one that gives the most turnover.

The limited cost trader rule

A limited cost trader is a business whose spending on VAT-inclusive goods is less than 2% of turnover, or less than £1,000 a year if that is higher. These businesses pay a flat 16.5% rate, which is high, and removes much of the benefit.

Many service businesses, such as consultants and contractors, who buy few goods can be limited cost traders. Services do not count towards the test, and certain items are excluded, such as food and drink, vehicles and fuel. As a result, many one-person service companies lose the advantage of the scheme.

A worked comparison

Suppose a consultancy bills £60,000 plus VAT in a year, so VAT charged is £12,000, and the gross turnover is £72,000. Its VAT-able purchases are £3,000 plus £600 VAT.

On the standard scheme, the VAT payable is £12,000 minus £600, which is £11,400. On the flat rate scheme at 14.5% of £72,000, the payment is £10,440, but the business cannot reclaim the £600. The difference is a saving of £960, before considering the 1% first-year discount, but the saving disappears if the business becomes a limited cost trader at 16.5%, because £72,000 times 16.5% is £11,880, which is higher than the standard scheme. Doing the comparison every year is therefore important.

Other VAT schemes to consider

Flat rate is not the only simplification. The cash accounting scheme lets you pay VAT when your customers pay you, which helps cash flow if you invoice on credit terms. The annual accounting scheme lets you file one return a year with advance payments. You can combine the cash scheme with the standard accounting scheme, but not with flat rate in the same way.

If you sell goods, the standard scheme may be best because you recover VAT on stock. If you have large capital purchases, the flat rate scheme still allows you to reclaim VAT on a single capital item costing £2,000 or more.

Making the decision

Run the numbers on your last 12 months, and on your plans for the next 12. Check whether you would be a limited cost trader, and consider the cost of the paperwork saved. If the saving is less than about £300 a year, the simplicity of the standard scheme may be better.

Review the choice every year. Your accountant can compare both options for you in minutes with your real figures, and switch schemes at the right point if your circumstances change.

Common mistakes with the flat rate scheme

The most common mistake is choosing the scheme without checking the limited cost trader rule, and then paying 16.5% on turnover that is mostly services. Another is using the wrong sector percentage, which can mean overpaying or underpaying. Some directors forget that the flat rate applies to gross turnover including VAT, so they apply it to the net figure.

A third mistake is staying in the scheme after the business changes. A company that starts buying more equipment or stock may find the standard scheme becomes cheaper. A short review at each year end avoids drifting into the wrong scheme.

How to switch schemes

You can leave the flat rate scheme at any time by writing to HMRC or through your online account, and you must leave if your turnover rises above £230,000. When you leave, you return to standard accounting, and you may be able to reclaim VAT on stock and assets you still hold. To join, apply through HMRC, and your start date will normally be the beginning of a VAT period.

Move at the start of a VAT period if possible, so your returns are clean. Make a note of any assets bought while in the scheme, because the rules for reclaiming VAT on capital items can be different.

Why record keeping still matters

Even though the flat rate scheme means you do not track VAT on every purchase, you still need good records. You must keep copies of your sales invoices, your gross turnover figures, and evidence that supports your sector percentage and any limited cost trader test. HMRC checks that the right percentage has been used, so the records must show your business activity. Making Tax Digital rules also apply, so your returns must be filed through compatible software.

Frequently asked questions

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