What is the Flat Rate VAT Scheme?
The Flat Rate VAT Scheme is a simplified method for small UK businesses to calculate and report VAT. Instead of tracking VAT on each transaction, eligible businesses pay a fixed percentage of their gross turnover (excluding VAT).
What Is VAT?
For a detailed explanation, please visit our article entitled What is VAT?. In short, VAT (Value-Added Tax) is added to most purchases in the UK - from everyday items to services. The standard rate is 20%.
As a VAT-registered business, you’re responsible for collecting VAT from your customers and then subtracting any VAT you’ve paid on business expenses. UK VAT returns are usually filed every quarter.
Introducing the New Flat Rate VAT Scheme
The Flat Rate VAT Scheme simplifies VAT reporting for small businesses. Each business category is assigned a fixed percentage applied to your annual turnover. This method can save time and money by eliminating the need to record VAT on every individual sale and purchase.
To see the applicable rates for different business categories, refer to the table below:
| Business Type | VAT Rate % |
|---|---|
| Accountancy or book-keeping | 14.50 |
| Advertising | 11.00 |
| Agricultural services | 11.00 |
| Any other activity not listed elsewhere | 12.00 |
| Architect, civil and structural engineer or surveyor | 14.50 |
| Boarding or care of animals | 12.00 |
| Business services not listed elsewhere | 12.00 |
| Catering services including restaurants and takeaways | 12.50 |
| Computer and IT consultancy or data processing | 14.50 |
| Computer repair services | 10.50 |
| Entertainment or journalism | 12.50 |
| Estate agency or property management services | 12.00 |
| Farming or agriculture not listed elsewhere | 6.50 |
| Film, radio, television or video production | 13.00 |
| Financial services | 13.50 |
| Forestry or fishing | 10.50 |
| General building or construction services* | 9.50 |
| Hairdressing or other beauty treatment services | 13.00 |
| Hiring or renting goods | 9.50 |
| Hotel or accommodation | 10.50 |
| Investigation or security | 12.00 |
| Labour-only building or construction services* | 14.50 |
| Laundry or dry-cleaning services | 12.00 |
| Lawyer or legal services | 14.50 |
| Library, archive, museum or other cultural activity | 9.50 |
| Management consultancy | 14.00 |
| Manufacturing fabricated metal products | 10.50 |
| Manufacturing food | 9.00 |
| Manufacturing not listed elsewhere | 9.50 |
| Manufacturing yarn, textiles or clothing | 9.00 |
| Membership organisation | 8.00 |
| Mining or quarrying | 10.00 |
| Packaging | 9.00 |
| Photography | 11.00 |
| Post offices | 5.00 |
| Printing | 8.50 |
| Publishing | 11.00 |
| Pubs | 6.50 |
| Real estate activity not listed elsewhere | 14.00 |
| Repairing personal or household goods | 10.00 |
| Repairing vehicles | 8.50 |
| Retailing food, confectionery, tobacco, newspapers or children’s clothing | 4.00 |
| Retailing pharmaceuticals, medical goods, cosmetics or toiletries | 8.00 |
| Retailing not listed elsewhere | 7.50 |
| Retailing vehicles or fuel | 6.50 |
| Secretarial services | 13.00 |
| Social work | 11.00 |
| Sport or recreation | 8.50 |
| Transport or storage, including couriers, freight, removals and taxis | 10.00 |
| Travel agency | 10.50 |
| Veterinary medicine | 11.00 |
| Wholesaling agricultural products | 8.00 |
| Wholesaling food | 7.50 |
| Wholesaling not listed elsewhere | 8.50 |
A Simple Example
If a transport company has a flat rate of 10% and earns an annual turnover of £90,000, the VAT owed would be calculated as:
£90,000 x 10% = £9,000
With HMRC’s 1% discount for new VAT registrants, the effective rate becomes 9%, reducing the VAT payable to:
£90,000 x 9% = £8,100
This results in a saving of £900.
Eligibility for the Flat Rate VAT Scheme
To be eligible, your business must:
- Be VAT registered
- Have a predicted annual turnover of less than £150,000 (excluding VAT)
Criteria for Ineligibility
Your business may not qualify if you have:
- Left the scheme in the last 12 months
- Committed a tax-related criminal offence in the last 12 months
- Joined or are eligible to join a VAT group in the last 24 months
- Registered a business division for VAT in the last 24 months
- Strong financial, economic, or organisational links to another business
- Already joined a margin or capital goods VAT scheme
Pros & Cons of the Flat Rate VAT Scheme
Pros
- Easy registration process
- Flexibility to withdraw from the scheme at any time
- Retain the difference between the standard 20% VAT charged and your flat rate
- Simplified record keeping
- Potential cost savings, including a 1% discount for new businesses
Cons
- Inability to reclaim VAT on most purchases (except for qualifying capital assets over £2,000)
- Limited cost businesses may incur a higher flat rate (e.g., 16.5%)
- Complexity in business classification
- Not ideal for businesses with high purchase volumes
Key Takeaways
- The Flat Rate VAT Scheme simplifies VAT reporting by applying a fixed percentage to turnover.
- Designed for VAT-registered small businesses with an annual turnover under £150,000.
- Offers significant time and cost savings, particularly with a 1% discount available for new businesses.
- Not suitable for businesses with high purchase volumes or those considered limited cost businesses.
In Summary
The new Flat Rate VAT Scheme provides small businesses with a streamlined approach to handling VAT, potentially reducing administrative burdens and saving money. However, it is crucial to evaluate your business’s specific needs and consult with an accountant before opting into the scheme.
For further assistance, try our VAT Calculator and explore additional VAT resources in our Articles section.
If you wish to register for the scheme, please visit our Register for VAT page. Indeed, there is much to consider. Business owners must carefully consider whether the flat rate VAT scheme is suitable for their needs, since some limitations and restrictions may make it less beneficial for some businesses. It is a good idea to discuss the pros and cons of the flat rate VAT scheme for your business with your accountant. You may sign up to the scheme by registering here, although do discuss it first with your accountant, as any decent accountant will be happy to perform this step on your behalf.