VAT Flat Rate Scheme
The Flat Rate Scheme (FRS) is a simplified VAT accounting method for small businesses. Instead of tracking VAT on every purchase, you pay a fixed percentage of your gross turnover to HMRC based on your industry.
How the Flat Rate Scheme Works
Under the FRS, you still charge your customers the normal 20% VAT. The difference is how you settle up with HMRC. Instead of tracking input and output VAT on every transaction, you just pay a flat percentage of your gross turnover. If your flat rate is lower than 20% (and it usually is), you pocket the difference.
Who Can Join?
You can join the Flat Rate Scheme if your VAT-taxable turnover (excluding VAT) is £150,000 or less. You must leave the scheme if your total business income exceeds £230,000 in any 12-month period.
First-Year Discount
In your first year of VAT registration, you get a 1% discount on your flat rate percentage. So if your industry rate is 14.5%, you'd pay 13.5% in your first year. This can represent a meaningful saving.
If your cost of goods (not services) is less than 2% of your VAT-inclusive turnover, or less than £1,000 per year, you're classified as a "limited cost trader" and must use a flat rate of 16.5% regardless of your industry. This catches most consultants, IT contractors, and service-based businesses with minimal goods purchases. Check carefully before joining. FRS isn't always beneficial.
Flat Rate Percentages by Industry
HMRC sets a specific flat rate for each type of business. Here are the most common categories:
| Business Type | Flat Rate % |
|---|---|
| Accountancy or bookkeeping | 14.5% |
| Architect, civil or structural engineer | 14.5% |
| Computer and IT consultancy | 14.5% |
| Computer repair services | 10.5% |
| Estate agency or property management | 12% |
| Film, radio, TV or video production | 13% |
| Hairdressing or beauty treatment | 13% |
| Journalism or photography | 11% |
| Labour-only building or construction | 14.5% |
| Management consultancy | 14% |
| Publishing | 11% |
| Restaurant or café | 12.5% |
| Retail (food) | 4% |
| Retail (other) | 7.5% |
| Transport or storage | 10% |
| Any other activity not listed | 12% |
| Limited cost trader | 16.5% |
See the full HMRC list for all categories.
When FRS Makes Sense (and When It Doesn't)
FRS is Beneficial When:
- Your business has low expenses relative to income (many service businesses)
- You want simpler VAT admin with no need to track VAT on every purchase
- Your flat rate percentage is significantly below 20%, giving you a VAT "profit"
- You're in your first year (1% discount applies)
FRS is Not Beneficial When:
- You're caught by the limited cost trader rule (16.5% rate), where you'd almost certainly pay less on standard VAT
- You have significant VAT-able purchases that you could reclaim on standard accounting
- You regularly make large capital purchases (equipment over £2,000 including VAT, which is the only expense you can reclaim on FRS)
- Your business activities span categories with very different rates
It's worth having your accountant review your flat rate setup whenever your business activities change. You might qualify for a lower industry rate, or it might make more sense to switch back to standard VAT accounting.
Working out VAT on an invoice?
Go to the VAT Calculator →This guide is for informational purposes only and does not constitute professional tax advice. Always verify current rates and rules with HMRC or a qualified accountant.