You cannot use the scheme if:
- your business has committed an offence involving VAT (such as VAT evasion) in the past year;
- you left the scheme in the last 12 months;
- your business has close financial or organisational links to another business.
When You Must Leave the Scheme
If, after joining, your business's total annual income (not just VAT-taxable turnover) exceeds £230,000, you must leave the Flat Rate Scheme — this is a different, higher threshold than the £150,000 entry threshold, and it's based on total income rather than VAT-taxable turnover alone.
How Much Will a Business Pay Under the Flat Rate Scheme?
Every registered business calculates its VAT bill by multiplying its flat rate percentage by its VAT-inclusive (gross) turnover — not the net figure.
Worked example: a business with a gross (VAT-inclusive) turnover of £50,000 on a flat rate of 10% would pay HMRC £5,000, regardless of how much VAT it actually paid on its own purchases that quarter.
New businesses get a 1% discount on their flat rate percentage for their first year of VAT registration — so a business on a standard 12% flat rate would only pay 11% during that first year.
How Much Do 'Limited Cost' Businesses Pay?
Introduced in April 2017, a 'limited cost business' is one that spends very little on goods relative to its turnover. Specifically, HMRC classes you as limited cost if your spending on goods is either:
- less than 2% of your VAT-inclusive turnover in a given accounting period, or
- more than 2% of your turnover but still less than £1,000 a year (adjusted pro-rata for shorter periods).
If either applies, you must use the limited cost business flat rate of 16.5%, regardless of what industry you're in — this overrides your normal sector-specific rate.
What doesn't count as 'goods' for this test: a number of costs are specifically excluded, even if you do spend on them, which means they don't help you avoid the 16.5% rate:
- food and drink for the business or its staff;
- vehicles, vehicle parts and fuel (except for businesses in the transport sector using their own or leased vehicles);
- capital expenditure of any kind.
What Do Other Business Types Pay?
If your business isn't classed as limited cost, your flat rate depends on your industry sector. HMRC publishes a fixed rate for each sector, and rates vary significantly — from as low as 4% up to 14.5%. Some common examples:
| Flat Rate | Business Sector |
|---|---|
| 4% | Retailing food, confectionery, tobacco, newspapers or children's clothing |
| 6.5% | Farming or agriculture not listed elsewhere; pubs; retailing vehicles or fuel |
| 7.5% | Retailing not listed elsewhere; wholesaling food |
| 8% | Membership organisation; printing; retailing pharmaceuticals, medical goods, cosmetics or toiletries |
| 9% | Manufacturing food; manufacturing yarn, textiles or clothing; packaging |
| 9.5% | General building or construction services*; manufacturing not listed elsewhere |
| 10% | Mining or quarrying; repairing personal or household goods; transport or storage (couriers, freight, removals, taxis) |
| 10.5% | Computer repair services; hotel or accommodation; travel agency |
| 11% | Advertising; agricultural services; photography; publishing; veterinary medicine |
| 12% | Business services not listed elsewhere; catering, restaurants and takeaways (12.5%); estate agency or property management |
| 13% | Hairdressing or other beauty treatment services; secretarial services |
| 13.5% | Financial services |
| 14% | Management consultancy; real estate activity not listed elsewhere |
| 14.5% | Accountancy or book-keeping; architect, civil/structural engineer or surveyor; computer and IT consultancy or data processing; labour-only building or construction*; lawyer or legal services |
| 16.5% | Limited cost business (overrides sector rate — see above) |
*Construction rates differ depending on whether you supply your own materials (general building, 9.5%) or labour only (14.5%). Rates for every sector are published in full by HMRC and are reviewed periodically — always confirm your exact rate against HMRC's current published list before registering.
How to Apply for the Flat Rate Scheme
Any business that registers for the VAT Flat Rate Scheme benefits from a reduced administrative burden. Other benefits include:
- a lower fixed rate than the standard rate in many sectors;
- fewer rules and regulations to follow day-to-day;
- simplified record keeping, since you don't need to log VAT on every individual purchase;
- financial certainty, since your VAT liability is a predictable percentage of turnover rather than fluctuating with input VAT.
If a business buys and sells goods outside the UK, or spends very little revenue on goods, it would generally do better outside the scheme — the fixed percentage can end up costing more than standard VAT accounting in these cases, since you give up the ability to reclaim input VAT on most purchases.
Flat Rate vs Standard VAT Accounting: A Worked Comparison
The Flat Rate Scheme isn't automatically cheaper — whether it saves you money depends heavily on how much VAT-bearing expenditure your business actually has.
Example — an IT consultancy: quarterly turnover of £20,000 (net), VAT-inclusive turnover £24,000. On the Flat Rate Scheme at 14.5%, VAT due is £3,480. Under standard VAT accounting, output VAT would be £4,000 (20% of £20,000 net) — but with, say, £500 of VAT-bearing expenses (VAT of £100 reclaimable), the standard-accounting VAT bill would be £3,900. In this example, the Flat Rate Scheme saves £420 that quarter.
The comparison flips for businesses with higher costs relative to turnover — the more VAT you'd otherwise reclaim on purchases, the less attractive the Flat Rate Scheme becomes. It's worth running this comparison with your actual numbers (or asking your accountant to) before choosing, and revisiting it if your spending pattern changes significantly.
How to Leave the Flat Rate Scheme
You can choose to leave the Flat Rate Scheme voluntarily at any time, in addition to being required to leave if your total income exceeds £230,000. To leave voluntarily, you write to HMRC confirming the date you want to leave from — you can't apply the scheme retrospectively to backdate an exit.
Once you've left, you can't rejoin the Flat Rate Scheme for 12 months, whether you left voluntarily or because you breached the exit threshold — so it's worth being confident in the decision before switching back to standard VAT accounting.
Bad Debt Relief on the Flat Rate Scheme
A common misconception is that bad debt relief doesn't apply on the Flat Rate Scheme, since you're not tracking input and output VAT in the usual way. In fact, HMRC guidance confirms you can still claim relief on unpaid invoices — but the calculation works differently to standard VAT accounting.
Rather than reclaiming the VAT you originally charged, you can claim the difference between the standard 20% VAT rate and your flat rate percentage, applied to the unpaid invoice amount, once the debt is 6 months overdue. It's a narrower relief than standard accounting offers, but it's real money many Flat Rate Scheme businesses leave unclaimed simply because they assume it doesn't apply to them.
Sources
- HMRC — Flat Rate Scheme for small businesses (VAT Notice 733)
- HMRC — Work out your flat rate percentage and check the limited cost business rules
- HMRC — Leave the Flat Rate Scheme
This page is for general information only and does not constitute tax advice. Flat rate percentages and thresholds are reviewed periodically by HMRC — always confirm your current rate against HMRC's published list before registering.