Value-added tax (VAT) is an important part of running a business in the UK, and the Flat Rate VAT Scheme can simplify that process for some small businesses. The scheme means fewer calculations, less admin, and a consistent method for paying His Majesty’s Revenue & Customs (HMRC) that doesn’t require you to track every expense.

However, the scheme is not the right fit for every business. Your sector and cost structure matter, and using it means you give up VAT reclaims on most purchases.

Below, we’ll explain how the Flat Rate VAT Scheme works and how to know whether it’s the right choice for your business.

What’s in this article?

• What is the Flat Rate VAT Scheme, and how does it work?
  
• Who qualifies for the Flat Rate VAT Scheme?
  
• What are the advantages and disadvantages of the Flat Rate VAT Scheme?
  
• What are the Flat Rate VAT percentages for different businesses?
  
• How can businesses register for the Flat Rate VAT Scheme?
  
• How should businesses calculate Flat Rate VAT?
  
• How Stripe Tax can help
  

What is the Flat Rate VAT Scheme, and how does it work?

The Flat Rate VAT Scheme is designed to simplify how small UK businesses handle VAT. Instead of tracking VAT on every sale and expense, you pay a fixed percentage of your total turnover.

Here’s how it works:

• You still charge customers the usual VAT rate (typically 20%).

• You pay HMRC a flat-rate percentage of your gross sales (sales you charged VAT on).

• You keep the difference between what you collected and what you owe. The difference helps cover the VAT you pay on business costs.

For example, if you invoice a client £1,200 (£1,000 + £200 VAT) and your flat rate is 10%, you send £120 to HMRC. You keep the other £80 from the VAT as part of your margin. The lower your expenses, the more you retain.

If you use the Flat Rate VAT Scheme, you can’t reclaim VAT on most purchases. The flat rate is meant to account for that. Capital assets over £2,000, such as a laptop or camera, are the exception; you can reclaim VAT on those purchases.

Who qualifies for the Flat Rate VAT Scheme?

The flat rate scheme is designed for small UK businesses that want to simplify VAT without sacrificing compliance. Clear rules govern who can and can’t use it.

You can join if:

• Your VAT-taxable turnover (excluding VAT) will be £150,000 or less in the next 12 months.

• You are VAT registered or registering now.

• You aren’t part of a VAT group or using another special VAT scheme, such as margin schemes.

• You haven’t left the flat rate scheme in the past 12 months.

You can’t join if:

• Your business is closely associated with another (e.g., shared ownership, operations that effectively act as one).

• You’ve had VAT penalties for fraud or serious noncompliance in the past year.

• You use the VAT cash accounting scheme. The flat rate scheme has its own cash-based method of accounting, so you can still account for VAT based on payments received, but you can’t use the standard cash accounting scheme at the same time.

Pay attention to the limited cost business rule. If you spend less than 2% of your turnover on goods or under £1,000 per year on goods in total, HMRC considers you a limited cost business. This scenario sets your flat rate at 16.5%, no matter your sector. It’s nearly break-even on the VAT you collect. If you run a service-based business with minimal expenses, this rule can quickly erase the scheme’s benefits.

What are the advantages and disadvantages of the Flat Rate VAT Scheme?

Before you decide whether the Flat Rate VAT Scheme is suitable for your business, make sure you understand how it operates and what it means in practice. Every business has different needs, but there are benefits and drawbacks all businesses should know.

Why businesses choose it

• It’s simpler: You don’t have to track input or output VAT or follow strict VAT invoice requirements. Just apply a fixed percentage to your gross sales.

• VAT returns take minutes: You file once a quarter, and you have to make only one calculation based on your gross sales.

• Bills are predictable: You always know what you’ll owe—a set percentage of what you bring in.

• You can keep fewer records: There’s no need to log every taxable expense.

• You might pay less VAT: If your costs are low, you keep the difference between what you collect and what you owe.

Where it can fall short

• You can’t reclaim VAT on everyday costs: The tax paid on expenses under £2,000 can’t be reclaimed. If your expenses are above average, the flat rate might be more expensive than standard VAT accounting.

• The limited cost business rule can cost you: If you spend too little on goods, you’re bumped to a 16.5% rate, which is rarely beneficial.

• There’s a turnover cap: The scheme is for small operations only. If you go over £230,000 in total annual income, you’re out.

What are the Flat Rate VAT percentages for different businesses?

Your flat rate depends on the nature of your business. HMRC assigns a percentage based on your sector, designed to reflect the typical VAT rate in your line of work.

A few examples:

• IT consultants: 14.5%

• Advertising firms: 11%

• Caterers and takeaways: 12.5%

• Hairdressers: 13%

• Retailers (general): 7.5%

• Other services (not listed elsewhere): 12%

The full rate list is available in HMRC’s sector table.

How can businesses register for the Flat Rate VAT Scheme?

You can register for the flat rate scheme when you register for VAT—just tick the box during the online VAT registration process. Alternatively, you can submit the form VAT600FRS via your HMRC online account or by email.

You’ll need to inform HMRC of your business sector so the authority can apply the correct flat rate. Once approved, you’ll use the scheme from the start of your next VAT accounting period, unless HMRC agrees to an earlier date.

You must leave the scheme if:

• Your VAT-inclusive turnover goes over £230,000 in any 12-month period.

• You plan to join a VAT group or use a special VAT scheme that conflicts with flat rate rules.

• You’re no longer eligible for any reason (e.g., you become a limited cost trader or change business structure).

You can leave voluntarily at any time by contacting HMRC, but once you leave, you typically can’t rejoin for 12 months. After you leave, make sure your records reflect the change, and start accounting under standard VAT rules from your exit date.

How should businesses calculate Flat Rate VAT?

Flat Rate VAT is based on your total sales including VAT, also known as your VAT-inclusive turnover.

Here’s how to calculate what you owe:

1. Add up your gross sales for the VAT period (usually a quarter). This includes all income subject to VAT, even if at a reduced or zero rate.

2. Apply your flat rate percentage to the total.

3. Pay that amount to HMRC. You don’t calculate or reclaim VAT on expenses.

Most accounting tools can automate this process, but it’s easy to do with a calculator and your sales totals. If you’re newly VAT registered, your flat rate drops by 1% for the first year. Make sure to take that discount.

How Stripe Tax can help

Stripe Tax reduces the complexity of tax compliance so you can focus on growing your business. Stripe Tax helps you monitor your obligations and alerts you when you exceed a sales tax registration threshold based on your Stripe transactions. In addition, it automatically calculates and collects sales tax, VAT, and goods and services tax (GST) on both physical and digital goods and services in all US states and in more than 100 countries.

Start collecting taxes globally by adding a single line of code to your existing integration, clicking a button in the Dashboard, or using our powerful application programming interface (API).

Stripe Tax can help you:

• Understand where to register and collect taxes: See where you need to collect taxes based on your Stripe transactions. After you register, switch on tax collection in a new state or country in seconds. You can start collecting taxes by adding one line of code to your existing Stripe integration or add tax collection with the click of a button in the Stripe Dashboard.

• Register to pay tax: Let Stripe manage your global tax registrations and benefit from a simplified process that prefills application details, which saves you time and simplifies compliance with local regulations.

• Automatically collect tax: Stripe Tax calculates and collects the right amount of tax owed, no matter what or where you sell. It supports hundreds of products and services and is up-to-date on tax rules and rate changes.

• Simplify filing: Stripe Tax seamlessly integrates with filing partners, so your global filings are accurate and timely. Let our partners manage your filings so you can focus on growing your business.

Learn more about Stripe Tax, or get started today.