The VAT flat rate scheme

You keep invoicing customers at the normal VAT rate. What changes is how much you pay over. GOV.UK says you work out your payment by multiplying your flat rate by your VAT inclusive turnover, meaning everything you have been paid including the VAT.

GOV.UK's own example is a photographer with a flat rate of 11%. They bill a customer £1,000 and add VAT at 20%, making £1,200 in total. Their flat rate payment is 11% of £1,200, or £132. Under normal VAT accounting the business would pay over the VAT it charged, less any VAT it could reclaim on costs, so whether the scheme saves money depends on how much VAT the business would otherwise reclaim.

You cannot reclaim VAT on your purchases, except for certain capital assets over £2,000. That is the trade-off for the simpler sums.

HMRC publishes a percentage for each type of business. You use the one that most closely describes your main activity, so read the full list on GOV.UK rather than relying on a summary. A few examples, copied from HMRC's current table:

Building work has two rates, and the line between them is set by materials. GOV.UK classes work as labour-only where the value of the materials supplied is less than 10% of the turnover for those services, and that attracts 14.5%. If materials are more than that, the business counts as general building or construction services at 9.5%. A trader whose mix of jobs changes over the year needs to keep an eye on which side of the line they fall.

Whatever your trade, you are classed as a limited cost business if your goods cost less than either 2% of your turnover or £1,000 a year, where your goods cost more than 2% of turnover. If that applies, you pay a higher rate of 16.5% instead of your trade's rate.

This often affects service businesses, such as consultants and freelancers whose main cost is their own time rather than goods. At 16.5% of VAT inclusive turnover there may be little or no saving compared with normal VAT accounting, so it is worth running your own numbers both ways before you join.

You may be able to join if your VAT turnover is £150,000 or less, excluding VAT. GOV.UK says you cannot join if:

• you left the scheme in the last 12 months
• you committed a VAT offence in the last 12 months, for example VAT evasion
• you joined, or were eligible to join, a VAT group in the last 24 months
• you registered for VAT as a business division in the last 24 months
• your business is closely associated with another business
• you have joined a margin or capital goods VAT scheme

You apply online or by post, and GOV.UK suggests registering for VAT and joining the scheme at the same time. You must leave if, on the anniversary of joining, your turnover in the last 12 months was more than £230,000 including VAT, or you expect it to be, or if you expect your income in the next 30 days alone to be more than £230,000 including VAT. You can also choose to leave at any time, but you must then wait 12 months before you can rejoin.

The scheme tends to suit businesses with few VAT-bearing costs and a trade rate well below 16.5%, while those who regularly buy goods or equipment with VAT on them may be better off reclaiming it in the normal way. It cannot be combined with VAT retail schemes or cash accounting, though annual accounting can be used alongside it. Our comparison of VAT accounting schemes sets those options side by side, and the VAT registration threshold guide covers when registration starts.

This is general information rather than tax advice. The VAT returns service page explains how accountants help with scheme decisions, and if you would like someone to check the numbers, we read every enquiry and, where we can, will put you in touch with a local accountant. See how it works.