What is the VAT Flat Rate Scheme?
The VAT Flat Rate Scheme is a simplified method for calculating VAT designed specifically for small businesses with turnover under £150,000. Instead of calculating VAT on individual purchases and claiming back input VAT, eligible businesses pay a fixed percentage of their turnover directly to HMRC. This percentage varies by business type, ranging from 4% for retail food businesses to 14.5% for professional services like accountancy and IT.
How the Flat Rate Scheme Works
- Calculate gross turnover: Add up all your sales including VAT for the quarter.
- Apply your flat rate: Multiply your gross turnover by your business-specific flat rate percentage.
- Pay HMRC: The result is what you pay to HMRC - no input tax recovery needed.
- Keep the difference: Any VAT you pay on supplies is yours to keep; you don't claim it back.
Who Can Use the Flat Rate Scheme?
The VAT Flat Rate Scheme is available to registered VAT businesses with annual turnover below £150,000. You must:
- Be registered for VAT
- Have turnover under £150,000 per year
- Be a UK business or have a UK business establishment
- Not be VAT exempt
Once you exceed £230,000 turnover, you must leave the scheme.
Flat Rate Percentages by Business Type
| Business Type | Flat Rate % |
|---|---|
| Accountancy | 14.5% |
| Advertising | 11% |
| Architect | 14.5% |
| Retail Food | 4% |
| Farming | 6.5% |
| Printing | 8.5% |
| General Building | 9.5% |
| IT Consultancy | 14.5% |
| Legal Services | 14.5% |
| Hotel / Accommodation | 10.5% |
Advantages and Disadvantages
Advantages
- ✓ Simpler accounting and bookkeeping
- ✓ No need to track input VAT
- ✓ Can be cheaper if costs are high
- ✓ Easier to forecast VAT payments
- ✓ Less complex tax returns
Disadvantages
- ✗ Cannot reclaim input VAT
- ✗ May be more expensive if costs are low
- ✗ Limited to businesses under £150k turnover
- ✗ Variation by business type