Flat Rate VAT Scheme: Is It Right for Your Business?

The Flat Rate Scheme (FRS) is one of the most underused VAT simplifications available to small businesses. Many eligible businesses aren't on it — and many that are haven't done the maths to confirm it's still benefiting them. This guide will help you decide.

What is the Flat Rate Scheme?

The Flat Rate Scheme is a simplified method of accounting for VAT designed for small businesses. Instead of calculating the exact VAT on every purchase and sale, you pay HMRC a fixed percentage of your gross (VAT-inclusive) turnover. The percentage depends on your business sector.

You still charge your customers the standard 20% VAT. The difference between what you charge and what you pay to HMRC is yours to keep — which is where the financial benefit comes from.

How the Flat Rate Scheme works

Here's a simple example:

• You're a management consultant. Your net sales in a quarter are £20,000.
• You charge 20% VAT, so gross turnover = £24,000.
• The flat rate for management consultancy is 14%.
• You pay HMRC: £24,000 × 14% = £3,360.
• You collected £4,000 in VAT from clients (£24,000 - £20,000).
• You keep £640 (£4,000 - £3,360).

Under the standard VAT scheme, you'd pay £4,000 minus any input VAT you can reclaim (on purchases). If your purchases are low (as they typically are for service businesses), FRS will almost certainly leave you better off.

Flat rate percentages by sector

HMRC publishes a full list of flat rate percentages by business type. Here are some of the most common:

Note: these rates are correct at the time of writing but can change. Always check the current HMRC list at gov.uk before joining or reviewing your FRS rate.

Who qualifies for FRS?

You can join the Flat Rate Scheme if:

• You are VAT registered
• Your expected taxable turnover in the next 12 months is £150,000 or less (excluding VAT)

You must leave the FRS if your turnover (including VAT) exceeds £230,000. You can also choose to leave voluntarily.

You cannot join FRS if you:

• Left the scheme in the last 12 months
• Are eligible to join an agricultural flat rate scheme
• Are a tour operator using the Tour Operators Margin Scheme
• Are closely associated with another FRS business (to prevent abuse)

The Limited Cost Trader rules

HMRC introduced the Limited Cost Trader rules in 2017 to prevent businesses with very few VAT-able costs from using FRS purely as a tax-saving mechanism.

You are a limited cost trader if your VAT-inclusive expenditure on relevant goods is either:

• Less than 2% of your VAT-inclusive turnover, OR
• Less than £1,000 per year (£250 per quarter)

If you're a limited cost trader, your flat rate is 16.5% — regardless of your sector. At 16.5% of gross turnover, the financial benefit of FRS largely disappears. For most service businesses with few goods costs, FRS is no longer advantageous.

How to calculate if FRS saves you money

To assess whether FRS is beneficial, compare what you'd pay under each scheme:

1. Find your flat rate percentage from the HMRC list (or check if you'd be a limited cost trader at 16.5%)
2. Estimate your quarterly gross turnover
3. Calculate FRS payment: Gross turnover × flat rate %
4. Calculate standard scheme VAT: Output VAT collected minus input VAT reclaimable
5. Compare the two — if FRS payment is lower, FRS is beneficial

Use our Flat Rate Scheme calculator to do this automatically.

Pros and cons of the Flat Rate Scheme

Pros:

• Simpler VAT accounting — no need to track input VAT on every purchase
• Potential financial benefit (you keep the difference between what you charge and what you pay HMRC)
• 1% discount in your first year of VAT registration
• Less time spent on bookkeeping

Cons:

• You cannot reclaim input VAT on most purchases (except certain capital goods over £2,000)
• Limited cost traders pay 16.5%, which may be worse than the standard scheme
• You still need to charge 20% VAT and issue VAT invoices
• It may not suit businesses with significant VAT-able expenses

How to join the Flat Rate Scheme

You can apply to join the FRS online through your HMRC VAT account, or by completing form VAT600 FRS. HMRC will confirm your flat rate percentage. You can join from any date agreed with HMRC — including the date your VAT registration takes effect, if you register and apply at the same time.

Also see our guides on VAT return deadlines and Making Tax Digital for VAT.