The Flat Rate Scheme trades accuracy for simplicity. Sometimes that trade pays you.

How it works

You still charge your customers normal VAT, usually 20%. But instead of paying HMRC that VAT minus what you paid on purchases, you pay a fixed percentage of your VAT-inclusive turnover. The percentage depends on your trade. You keep the difference between what you charged and what you hand over.

You cannot reclaim VAT on purchases, except certain capital assets costing £2,000 or more.

GOV.UK’s example: a photographer bills £1,000 plus £200 VAT, so £1,200 in total. The photography flat rate is 11%. She pays HMRC 11% of £1,200, which is £132, and keeps the other £68 of the VAT she charged. In your first year of VAT registration you get a 1% discount on your flat rate.

The limited cost trap

This is where the scheme quietly dies for a lot of people. You are a “limited cost business” if your spending on goods is less than 2% of your turnover, or less than £1,000 a year. Goods means goods. Not rent, not software subscriptions, not your phone bill, not fuel for the van.

Limited cost businesses pay 16.5% of VAT-inclusive turnover. Run the numbers: on every £1,200 you invoice, you pay £198. Of the £200 VAT you charged, you keep £2. Meanwhile you still cannot reclaim the VAT on what you buy. For a consultant or freelancer whose only costs are services, standard VAT accounting with full reclaims is almost always better.

Who wins and who loses

The scheme suits businesses with modest but real goods costs and a flat rate well below 16.5%: some trades, photographers, certain shops. It also suits people who value simple bookkeeping over squeezing every pound, because the admin genuinely is lighter.

It suits nobody who buys significant standard-rated goods or equipment, because you give up the reclaims. And it suits nobody classed as limited cost unless their flat rate maths says otherwise, which it rarely does.

The boundaries

Join only if your VAT turnover is £150,000 or less, excluding VAT, and you must apply to HMRC to get in. Leave if the total value of your income for the year goes over £230,000, including VAT. VAT Notice 733 sets out the full rules, including the £191,500 lookahead test that can let you stay in if the rise is a blip.

Sources

All pages checked 20 October 2026.

• VAT Flat Rate Scheme overview: https://www.gov.uk/vat-flat-rate-scheme
• How much you pay: https://www.gov.uk/vat-flat-rate-scheme/how-much-you-pay
• Flat Rate Scheme for small businesses (VAT Notice 733): https://www.gov.uk/guidance/flat-rate-scheme-for-small-businesses-vat-notice-733–2

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