Pay a fixed percentage of your gross turnover instead of tracking VAT on every transaction. Simpler bookkeeping — but not always cheaper. Here's how to tell.
Last updated: June 2026
Instead of calculating VAT owed as (VAT you charged customers) minus (VAT you paid on purchases), you apply a single fixed percentage to your gross turnover (including VAT) and pay that to HMRC. You still charge customers the standard 20% VAT rate on your invoices as normal — the flat rate percentage only affects what you actually hand over to HMRC, not what you charge.
The gap between the VAT you charge (20%) and the lower flat rate percentage you pay HMRC is effectively kept by your business — this is the scheme's main appeal for businesses with low overhead costs, since you're not giving up much in reclaimable input VAT to begin with.
Crucially, you generally cannot separately reclaim VAT on individual purchases while on the Flat Rate Scheme — the flat percentage is meant to already factor in a typical amount of input VAT for your sector. The main exception is capital asset purchases over £2,000 including VAT, which can still be reclaimed separately.
HMRC assigns a flat rate percentage by trade sector — ranging roughly from 4% (retailers of food, confectionary, tobacco) up to around 14.5% (some labour-intensive services) for typical categories, with the exact list published by HMRC and reviewed periodically.
However, since 2017 there's a separate 16.5% "limited cost trader" rate that overrides your sector percentage if your VAT-inclusive spending on goods (not services) is less than 2% of your turnover, or less than £1,000 a year, whichever is greater. This specifically targets contractors and consultants with very low material costs — most freelance consultants, coders, designers, and similar service businesses fall into this category and end up on 16.5% regardless of their nominal sector.
In your first year of VAT registration, you get a 1 percentage point discount off your normal flat rate percentage, which applies until the day before the first anniversary of your registration. This is a small but genuine saving worth factoring into your first-year decision.
The scheme tends to work out favourably when:
It tends to work out worse when you have significant deductible costs (stock, equipment, subcontractors, marketplace/platform fees), since you lose the ability to reclaim VAT on those while gaining a relatively small discount off the 20% you're already charging.
No. You still charge the normal 20% (or applicable) VAT rate on your invoices to customers. The flat rate percentage only affects what you remit to HMRC, not what you charge.
Yes. You can leave the scheme voluntarily at the end of any VAT accounting period, or you must leave if your total income exceeds £230,000 (including VAT) in a 12-month period, or you're no longer eligible for other reasons.
Broadly, if your VAT-inclusive spend on goods (not services, and excluding things like food, drink, and vehicle costs, which have specific exclusions) is under 2% of turnover or under £1,000/year, whichever is greater, you're a limited cost trader and pay 16.5% regardless of your sector.
Generally only on capital asset purchases of £2,000 or more including VAT (a single purchase, not the total of several smaller ones) — everyday purchases are not separately reclaimable, since the flat rate is designed to already account for typical input VAT.
HMRC guidance says to use the category that most closely describes what you expect your business to be doing in the coming year, based on the greater part of your turnover — not a blend of categories. Getting this wrong is a common compliance issue, so it's worth double-checking against HMRC's published sector list or asking an accountant if your business spans multiple categories.
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