VAT Flat Rate Scheme: Is It Worth It for a Small Business?

The VAT Flat Rate Scheme is a voluntary simplified way for eligible small businesses to calculate VAT owed to HMRC. Instead of offsetting VAT on every sale and purchase in the usual way, you apply a fixed percentage to VAT-inclusive turnover. It can reduce admin, but it is not automatically cheaper.

Who can join the Flat Rate Scheme?

HMRC says businesses can generally use the scheme if annual taxable turnover is £150,000 or less excluding VAT, subject to further eligibility rules. The percentage depends on the business type. First-year VAT registrants may receive a 1% discount.

Limited cost businesses

A limited cost business normally pays a higher 16.5% flat rate. This can apply where spending on relevant goods is below HMRC's thresholds. Many service businesses should check this carefully; it can remove the saving that makes the scheme look attractive at first glance.

A sensible comparison

• Model a recent 12-month period under standard VAT and Flat Rate rules.
• Include VAT on costs you would normally recover.
• Check whether your customers are VAT registered and how cash flow works for you.
• Review the decision if turnover, purchases or business activity change.