How does the UK VAT Flat Rate Scheme work?
Pay HMRC a fixed percentage of your VAT-inclusive turnover instead of working out VAT on purchases.
Under the VAT Flat Rate Scheme you pay HMRC a fixed percentage of your VAT-inclusive turnover instead of the difference between the VAT you charge and the VAT you pay. You can join if your expected VAT taxable turnover is £150,000 or less excluding VAT, and you must apply to HMRC. You still charge customers the normal VAT rate on invoices, and you keep the difference between what you collect and what you pay HMRC. You cannot normally reclaim VAT on purchases.
- Eligibility: VAT turnover of £150,000 or less, excluding VAT.
- You pay a fixed percentage of VAT-inclusive turnover.
- 1% discount in your first year as a VAT-registered business.
- Limited cost businesses pay 16.5%.
- No reclaim of VAT on purchases, except capital assets over £2,000.
How it works
Check you are eligible and apply to HMRC to join. The scheme is not automatic.
Find your flat rate percentage, which depends on your type of business, on GOV.UK.
Keep issuing normal VAT invoices at the standard rate. Customers see no difference.
Each return, apply your flat rate to your VAT-inclusive turnover for the period. That is the amount you pay HMRC.
Check whether you are a limited cost business. That means your goods spending is less than 2% of turnover or £1,000 a year. If so, the rate is 16.5%.
Legal references
- GOV.UK, VAT Flat Rate Scheme.
- HMRC VAT Notice 733, Flat Rate Scheme for small businesses.
- Value Added Tax Act 1994, section 26B.
Frequently asked questions
Is the Flat Rate Scheme always cheaper?
No. It can save time and sometimes money, but if you have large VAT-bearing purchases the standard method can cost you less. Compare both, or ask an accountant.
Which turnover do I apply the rate to?
The flat rate applies to VAT-inclusive turnover, which means your sales plus the VAT you charged on them.
What is a limited cost business?
One whose spending on goods is less than either 2% of its turnover or £1,000 a year. It pays 16.5% instead of its normal flat rate.
Does 4invoices calculate my flat rate payment?
No. 4invoices does not run VAT returns or apply flat rates. It lets you create invoices with a VAT rate on each line, in any currency with an exchange rate, and download them as PDFs. Calculate the amount payable to HMRC in your VAT return or with your accountant.