What Is the Flat Rate Scheme?
The Flat Rate VAT Scheme is a simplified VAT accounting method designed for small businesses with annual taxable turnover of £150,000 or less (excluding VAT). Instead of calculating the actual difference between output VAT charged and input VAT paid, you pay a fixed percentage of your gross turnover to HMRC.
The scheme reduces administrative burden significantly. You don't need to track and calculate input VAT on every business purchase. You simply apply your sector's flat rate percentage to your total VAT-inclusive turnover and pay that amount to HMRC.
However, the trade-off is that you cannot reclaim VAT on most purchases. The flat rate percentage is calculated to approximately account for typical input VAT in each business sector, but individual businesses may pay more or less than they would under standard VAT accounting.
💡 Key Concept
Under the Flat Rate Scheme, you still charge clients the standard 20% VAT on your invoices. The "flat rate" refers only to how you calculate what you pay to HMRC — not what you charge customers.
How It Works
Here's how the Flat Rate Scheme operates in practice:
Step 1: Charge VAT normally
You charge clients the standard 20% VAT on your services, just like any VAT-registered business. Your invoices show the service cost, VAT at 20%, and the total including VAT.
Step 2: Calculate your gross turnover
At the end of each VAT period, total up all your VAT-inclusive sales. This is your gross turnover — the full amount clients paid you, including VAT.
Step 3: Apply your flat rate percentage
Look up the flat rate percentage for your business sector. Multiply your gross turnover by this percentage. This is the amount you pay to HMRC.
Step 4: Keep the difference
The difference between the VAT you charged customers and the flat rate amount you pay HMRC is yours to keep. For most freelancers, this creates a small profit on VAT.
💡 Practical Example
A freelance designer charges £10,000 + £2,000 VAT = £12,000 in a quarter. Under the Flat Rate Scheme for computer and IT consultancy (14.5%), they pay HMRC: £12,000 × 14.5% = £1,740. They keep: £2,000 - £1,740 = £260. That's a £260 VAT profit for the quarter.
Limited cost traders:
A "limited cost trader" is a business that spends less than 2% of gross turnover on relevant goods (or less than £1,000 per year if greater). Limited cost traders must use a flat rate of 16.5% regardless of their sector. This often makes the Flat Rate Scheme uneconomical for service-based freelancers with minimal physical goods purchases.
Flat Rates by Sector
HMRC publishes flat rate percentages for various business sectors. Here are the rates most relevant to freelancers:
| Business Sector | Flat Rate % |
|---|---|
| Accountancy or book-keeping | 14.5% |
| Advertising | 11% |
| Architect, civil and structural engineer | 14.5% |
| Computer and IT consultancy or data processing | 14.5% |
| Computer repair services | 10.5% |
| Entertainment or journalism | 12.5% |
| Film, radio, television or video production | 13% |
| Legal services | 14.5% |
| Management consultancy | 14% |
| Photography | 11% |
| Publishing | 11% |
| Secretarial services | 13% |
| Social work, welfare or care services | 11% |
| Translation, interpreting or teaching | 12% |
| Limited cost trader (any sector) | 16.5% |
If your business doesn't fit neatly into one category, choose the sector that most closely matches your main business activity. If in doubt, consult HMRC guidance or an accountant.
Calculating Your Flat Rate VAT
The calculation is straightforward, but it's essential to apply it correctly:
Formula:
VAT Payment = Gross Turnover (VAT-inclusive) × Flat Rate Percentage
What to include in gross turnover:
- All standard-rated supplies (including the VAT)
- All zero-rated supplies
- VAT-exempt income that's related to the main business
- Supplies of capital goods you've used in the business
What to exclude:
- Sales of capital goods the flat rate was not applied to
- Private sales, not part of the business
💡 Practical Example
Tom is a freelance management consultant. His quarterly figures:
• Consulting fees: £15,000 + £3,000 VAT = £18,000
• Training workshop: £2,000 + £400 VAT = £2,400
• Total gross turnover: £20,400
Management consultancy flat rate: 14%
VAT to pay: £20,400 × 14% = £2,856
VAT charged to clients: £3,400
VAT profit: £3,400 - £2,856 = £544
Comparison with standard VAT:
Under standard VAT, Tom would pay £3,400 (output VAT) minus any input VAT on business expenses. If his quarterly business expenses totalled £1,800 including £300 VAT, he'd pay £3,400 - £300 = £3,100 to HMRC. The Flat Rate Scheme saves him £3,100 - £2,856 = £244.
First Year 1% Discount
New VAT registrations benefit from a 1% discount on the flat rate percentage for the first year. This discount applies from the date of VAT registration (not the date you join the Flat Rate Scheme if different).
The discount runs for exactly one year from your VAT registration date. After 12 months, you must use the full flat rate percentage.
💡 Practical Example
Emma registers for VAT on 1 March 2026 and joins the Flat Rate Scheme immediately. She's a photographer, so her flat rate would normally be 11%. For her first year (until 28 February 2027), she pays just 10%. On quarterly gross turnover of £15,000, she pays £1,500 instead of £1,650 — saving £150 per quarter, or £600 in her first year.
Limited cost trader warning:
Even with the first-year discount, limited cost traders pay 15.5% (16.5% - 1%). This is often higher than the effective rate under standard VAT accounting, making the scheme unsuitable for these businesses.
Is It Right for You?
The Flat Rate Scheme isn't universally beneficial. Use this decision framework:
The Flat Rate Scheme likely suits you if:
- Your annual taxable turnover is below £150,000 (excluding VAT)
- You have minimal input VAT to reclaim (few business expenses)
- You're not a limited cost trader (spend more than 2% on goods)
- You value simplified administration over maximising VAT reclaims
- Your sector has a low flat rate percentage
The Flat Rate Scheme probably doesn't suit you if:
- You regularly make significant business purchases with VAT
- You're classified as a limited cost trader
- Your sector has a high flat rate percentage (14.5%+)
- You expect to exceed £150,000 turnover soon
- You want to reclaim VAT on a major capital purchase
The calculation to make:
Compare what you'd pay under each scheme. Calculate your typical quarterly output VAT (what you charge) and input VAT (what you could reclaim on expenses). Compare the difference (what you'd pay under standard VAT) to what you'd pay under the Flat Rate Scheme.
💡 Decision Example
Hannah is a graphic designer considering the Flat Rate Scheme.
• Quarterly turnover: £12,000 (gross, including £2,000 VAT)
• Quarterly expenses: £600 (including £100 reclaimable VAT)
Standard VAT payment: £2,000 - £100 = £1,900
Flat Rate payment (advertising, 11%): £12,000 × 11% = £1,320
The Flat Rate Scheme saves Hannah £580 per quarter (£2,320 annually). Good decision.
Exception for capital goods:
Under the Flat Rate Scheme, you can reclaim VAT on capital goods costing £2,000 or more (including VAT). If you're planning a major equipment purchase, this partial reclaim option makes the scheme more attractive.
How to Join the Scheme
Joining the Flat Rate Scheme requires application to HMRC. Here's the process:
Eligibility check:
- You must be VAT registered (or registering)
- Your taxable turnover must be £150,000 or less (excluding VAT) for the next 12 months
- You must not have left the scheme within the previous 12 months
How to apply:
- If registering for VAT, you can join the Flat Rate Scheme during VAT registration
- If already VAT registered, apply online through your VAT online account
- Or call the VAT helpline: 0300 200 3700
- Or write to HMRC's National Registration Service
Start date:
You can choose your start date for the Flat Rate Scheme. If joining mid-year, you'll need to account for any transitional periods carefully. HMRC will confirm your start date in writing.
Leaving the scheme:
You must leave if your total business income exceeds £230,000 in a year. You can also choose to leave voluntarily — give 30 days notice to HMRC. After leaving, you cannot rejoin for 12 months.
⚠️ Important Warning
Check if you're a limited cost trader before joining. Many service-based freelancers with minimal goods purchases fall into this category. At 16.5%, the limited cost trader rate often exceeds what you'd pay under standard VAT accounting, making the scheme a poor choice.