Once you’re VAT registered, you’ll need to decide how to account for VAT. For many small businesses, the VAT Flat Rate Scheme (FRS) can significantly reduce the time spent on VAT administration — and may even save you money.
How Standard VAT Accounting Works
Normally, VAT-registered businesses charge 20% VAT on their sales, reclaim the VAT they pay on business purchases, and pay HMRC the difference. This requires careful tracking of VAT on every transaction — both income and expenditure.
How the Flat Rate Scheme Works
Under the Flat Rate Scheme, you still charge your customers 20% VAT as normal. But instead of calculating the difference between VAT charged and VAT reclaimed, you simply pay HMRC a fixed percentage of your gross turnover (i.e. your VAT-inclusive sales). The flat rate percentage varies by industry — for example:
- Accountancy or bookkeeping: 14.5%
- General building or construction services: 9.5%
- IT services: 14.5%
- Retailing food: 4%
- Hairdressing: 13%
- Consulting or other professional services: 14%
You can find the full list of flat rate percentages on HMRC’s website.
Where the Saving Comes From
Because you’re paying a percentage that’s lower than 20%, you keep the difference. For example, if your flat rate is 12% and you charge 20% VAT on your sales, the 8% difference belongs to your business. This is the potential saving — but it only exists if the flat rate percentage for your sector is low enough relative to the VAT you’d normally pay after reclaiming input VAT.
The Downside: You Can’t Reclaim Input VAT
The trade-off with the Flat Rate Scheme is that you cannot reclaim VAT on most purchases. The only exception is for capital assets costing more than £2,000 (including VAT) — you can reclaim the VAT on these even when using the FRS.
This makes the scheme less suitable for businesses with significant VATable expenditure — for example, those buying a lot of materials or equipment. It tends to work best for service-based businesses with low overheads.
The Limited Cost Trader Rate
HMRC introduced a safeguard in 2017 for limited cost traders — businesses that spend very little on goods (less than 2% of VAT-inclusive turnover, or less than £1,000 per year). These businesses must use a flat rate of 16.5%, regardless of their sector, which significantly reduces the benefit of the scheme.
Services businesses and labour-only contractors often fall into this category, so it’s important to check before assuming the FRS will save you money.
Who Can Join the Flat Rate Scheme?
You can join the FRS if your VAT-exclusive taxable turnover is expected to be £150,000 or less in the next 12 months. Once on the scheme, you can stay until your total business income (including VAT) exceeds £230,000.
Is It Worth It for Your Business?
The only way to know for certain is to run the numbers based on your specific turnover, costs, and sector. PBAS can do this for you quickly — and if the FRS isn’t the right option, we can ensure your standard VAT accounting is handled correctly and efficiently.
We handle VAT registration and returns for sole traders and small businesses across Scotland. Get in touch if you’d like us to assess whether the Flat Rate Scheme could work for you.
Need Help with This?
PBAS provides affordable bookkeeping and accountancy services for sole traders and small businesses across East Lothian, Edinburgh, Midlothian and throughout Scotland. If you’d like a hand with your accounts, self assessment or any tax matter, get in touch for a free, no-obligation chat.
This article provides general guidance only. For specific advice on your circumstances, consult HMRC directly via the GOV.UK VAT Flat Rate Scheme guide or speak to a qualified bookkeeper.
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