Guide
Join the VAT Flat Rate Scheme
How to join the Flat Rate Scheme and calculate your VAT using a fixed percentage of turnover. Includes eligibility criteria, flat rate percentages by sector, the limited cost trader rules, and when you must leave.
The VAT Flat Rate Scheme simplifies how small businesses account for VAT. Instead of calculating VAT on every transaction and reclaiming input VAT on purchases, you pay HMRC a fixed percentage of your gross (VAT-inclusive) turnover based on your business type.
This can save time on VAT administration and, depending on your circumstances, may reduce your VAT bill. However, the scheme is not suitable for everyone - you need to understand the rules to decide if it is right for your business.
Check if you can join
Before applying, you must check that your business meets all the eligibility criteria. If you do not meet these requirements, HMRC will reject your application.
Important: The £150,000 limit applies to your expected VAT-taxable turnover in the next 12 months, not your current turnover. If you are close to this limit and expect to grow, consider whether joining makes sense - you may need to leave soon after joining.
How to join the scheme
You can join the Flat Rate Scheme when you register for VAT, or at any time afterwards if you are already VAT registered.
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Apply online through your VAT account
Sign in to your HMRC business tax account and select 'Join the Flat Rate Scheme'. The online application takes about 10 minutes if you have your business details ready.
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Wait for HMRC confirmation
HMRC will write to you within 3 working days to confirm you can use the scheme. Do not start using the flat rate until you receive this confirmation.
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Note your start date
HMRC will tell you when you can start using the scheme. This is usually from the start of your next VAT period after approval. You cannot backdate the scheme to earlier periods.
If you are registering for VAT for the first time, tick the box to join the Flat Rate Scheme on your VAT registration form. This lets you start using the scheme from day one of your VAT registration.
Find your flat rate percentage
Your flat rate depends on your business sector. Use the rate that best describes your main business activity. If your business spans multiple categories, use the rate for your main source of income.
Choosing between business types
If your business could fit into more than one category, choose the one that describes your main source of business income. For example, if you are a photographer who also does graphic design, use the photography rate (11%) if most of your income comes from photography work.
If you are genuinely unsure which category applies, you can ask HMRC for a ruling. Use the 'Any other activity not listed' rate (12%) while you wait for their decision.
First-year discount
If you are in your first year of VAT registration, you can reduce your flat rate percentage by 1%. This discount applies for your first full year as a VAT-registered business.
- Discount amount
- 1% reduction in your sector's flat rate percentage
- Eligibility
- First 12 months of VAT registration only
- Example (IT consultant)
- 14.5% becomes 13.5% in your first year
- Example (food retailer)
- 4% becomes 3% in your first year
- How to claim
- Apply the reduced rate automatically when calculating your VAT return
The first-year discount can make a noticeable difference to your VAT bill, particularly for service businesses with higher flat rates. Make sure you apply it correctly and stop using it after your first year ends.
Calculate VAT under the Flat Rate Scheme
The calculation is straightforward once you know your flat rate percentage. You apply your rate to your total VAT-inclusive turnover for each VAT period.
What happens to the difference?
You still charge customers VAT at the standard rate (usually 20%). The difference between what you charge customers and what you pay HMRC is yours to keep. This is one way the scheme can benefit your business.
Example: You invoice a customer £1,200 including 20% VAT (£1,000 + £200 VAT). If your flat rate is 14.5%, you pay HMRC £174 (14.5% of £1,200). You keep the £26 difference.
However, remember you cannot reclaim VAT on most purchases, so the overall benefit depends on your business costs.
Limited cost trader rules
This is the most important rule to understand before joining the scheme. If you qualify as a 'limited cost trader', you must use a flat rate of 16.5% regardless of your business type. This often makes the scheme uneconomical.
Why this matters
The limited cost trader rule was introduced in April 2017 to prevent service businesses with minimal material costs from gaining unfair advantages. If you are a consultant, freelancer, or other service provider who buys few physical goods, you are likely to be a limited cost trader.
At 16.5%, most businesses would pay more VAT than under standard VAT accounting. Run the numbers before joining: if you typically reclaim more than 3.5% of your turnover in input VAT (the difference between 20% and 16.5%), standard VAT accounting is probably better for you.
Limited cost trader test
You must check this at the end of each VAT period. If you spent less than 2% of your turnover on qualifying goods (or less than £1,000, whichever is more), you must use the 16.5% flat rate for that period.
The test applies per VAT period, so your status can change from period to period if your goods spending varies.
Record keeping
Even though the Flat Rate Scheme simplifies VAT calculations, you still need to keep proper records. HMRC may inspect these at any time.
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Record all sales
Keep records of all your sales, including VAT-inclusive amounts. You need this to calculate your flat rate turnover each period.
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Keep purchase invoices
You still need to keep VAT invoices for all purchases, even though you cannot reclaim VAT on most of them. Keep invoices for capital purchases over £2,000 separately.
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Track your goods spending
If you are close to the limited cost trader threshold, keep detailed records of what you spend on qualifying goods. This helps you determine which rate to use each period.
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Store records for 6 years
VAT records must be kept for 6 years. This includes sales records, purchase invoices, and your flat rate calculations.
When you must leave the scheme
You can leave the Flat Rate Scheme voluntarily at any time. However, there are circumstances where you must leave, even if you would prefer to stay.
Checking the threshold
You must check on the anniversary of joining whether your total income (including exempt supplies) in the previous 12 months exceeded £230,000 including VAT. You must also leave immediately if you expect your income to exceed £230,000 in the next 30 days alone.
Warning: The leaving threshold (£230,000) is calculated including VAT, while the joining threshold (£150,000) excludes VAT. This difference of around £30,000 provides some headroom, but growing businesses should monitor their turnover carefully.
Is the Flat Rate Scheme right for your business?
The scheme works well for some businesses but not others. Consider these factors before joining.
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Check if you are a limited cost trader
If you spend less than 2% of turnover on goods (excluding capital items, food, drink, and vehicles), you must use 16.5%. At this rate, most businesses pay more than under standard VAT.
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Compare your effective VAT rate
Calculate what you actually pay in VAT under standard accounting (output VAT minus input VAT reclaims). If this is less than your flat rate percentage multiplied by your turnover, standard VAT is cheaper.
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Consider your purchase patterns
If you make significant VAT-able purchases (stock, equipment, professional services), you lose the benefit of reclaiming that VAT under the flat rate scheme.
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Value your time
The scheme saves time on VAT administration. If you spend hours reconciling VAT each quarter, the time savings may outweigh a slightly higher VAT bill.
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Plan for growth
If you expect to exceed £230,000 turnover within 1-2 years, the scheme may not be worth joining. You would have to leave and switch to standard VAT accounting anyway.
Worked example: comparing schemes
Consider an IT consultant with quarterly turnover of £15,000 (plus VAT = £18,000 including VAT). They spend £500 per quarter on VAT-able expenses (software subscriptions, office supplies).
- Standard VAT: Output VAT
- £3,000 (20% of £15,000)
- Standard VAT: Input VAT reclaim
- £100 (VAT on £500 expenses)
- Standard VAT: Net VAT payable
- £2,900 per quarter
- Flat Rate (14.5%): VAT payable
- £2,610 (14.5% of £18,000)
- Quarterly saving with Flat Rate
- £290
- Annual saving with Flat Rate
- £1,160
In this example, the Flat Rate Scheme saves money because the consultant has low expenses and does not reclaim much input VAT. However, they must check they are not a limited cost trader - if their £500 in expenses does not count as 'goods', they would have to use 16.5% instead, paying £2,970 per quarter (more than standard VAT).
What to do next
If you have decided the Flat Rate Scheme is right for your business, you can join through your HMRC online account. If you are still unsure, consider speaking to an accountant who can review your specific circumstances.
Remember that you cannot combine the Flat Rate Scheme with the Cash Accounting Scheme or Annual Accounting Scheme. If cash flow timing is your main concern, the Cash Accounting Scheme may be a better alternative.