How it works
You still charge customers the standard 20% VAT. But instead of paying HMRC the difference between the VAT you charge and the VAT on your purchases, you pay a fixed percentage of your VAT-inclusive turnover. The percentage is set by your trade sector, and you generally can’t reclaim input VAT (except on a single capital asset costing over £2,000). There’s a 1% discount in your first year of registration.
The limited-cost-trader trap
If your business spends very little on goods — under 2% of turnover, or less than £1,000 a year — you’re a limited cost trader and must use a flat rate of 16.5%. That’s 16.5% of gross (VAT-inclusive) turnover, which works out to nearly all the VAT you charged — leaving almost no benefit. Because most consultants, contractors and labour-only service companies buy few goods, this rule catches a great many of them.
Is it worth it now?
- Still useful: low-cost service businesses that aren’t limited cost traders and want simpler VAT admin
- Often not worth it: limited cost traders (16.5%), and any business with meaningful VAT to reclaim on costs
- Compare both: the only reliable answer is to model the flat rate against standard VAT for your actual figures
Let us compare the schemes for you
We work out whether the Flat Rate Scheme beats standard VAT for your company — and handle registration, scheme choice and quarterly returns either way. Call 0114 327 1480.