Standard VAT accounting is usually better if you are a limited cost trader, have large standard rated costs, or make zero rated or exempt sales. The Flat Rate Scheme usually suits service businesses with few costs that pass the limited cost test and so use their lower sector rate. Under the scheme you pay a fixed percentage of your VAT inclusive turnover and generally cannot reclaim VAT on purchases. Run both calculations on last year’s figures before you decide.
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What is the difference between the Flat Rate Scheme and standard VAT accounting?
Under standard VAT accounting you charge VAT on your sales, reclaim the VAT on your business purchases, and pay HMRC the difference. Under the Flat Rate Scheme, set out in HMRC VAT Notice 733, you still charge your customers VAT in the normal way, but you pay HMRC a fixed percentage of your VAT inclusive turnover. The percentage depends on your business sector, and you generally cannot reclaim VAT on your purchases. For how the scheme works in detail, see our VAT Flat Rate Scheme guide.
The trade off is simple. The scheme saves paperwork and can leave you with a small margin of VAT to keep. Standard accounting takes more record keeping but gives back every penny of VAT you can properly reclaim.
Is the Flat Rate Scheme worth it for my business?
It can be, if three things are true:
- You pass the limited cost test, so you use your sector rate rather than 16.5%.
- Your standard rated costs are low, so you are not giving up much reclaimable VAT.
- Most of your sales are standard rated. HMRC applies the flat rate to your zero rated and exempt income too, which makes the scheme expensive if those sales are a large share of turnover.
To join, your taxable turnover (excluding VAT) in the next year must be expected to be £150,000 or less.
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What is a limited cost trader and why does 16.5% matter?
You are a limited cost trader if your spending on relevant goods, including VAT, is either less than 2% of your flat rate turnover, or more than 2% but less than £1,000 a year. If so, you must use a flat rate of 16.5%, whatever your sector.
Relevant goods are narrowly defined. HMRC excludes all services, capital expenditure goods, food or drink for you or your staff, and vehicle costs including fuel (unless you are in the transport sector). So a consultant whose main costs are software subscriptions, accountancy fees and a laptop will often fail the test.
At 16.5%, the scheme rarely pays. A 20% VAT charge on a £100 net sale gives a VAT inclusive total of £120, and 16.5% of £120 is £19.80. You keep just 20p in every £120 billed, and you give up any VAT on your costs. The test is applied each VAT period, so your rate can change from one return to the next.
When does standard VAT accounting win? A worked comparison
The figures below are illustrative only, for a single year, with all sales standard rated at 20%. They ignore the first year discount and are not a substitute for running your own numbers.
| Scenario | Flat rate VAT payable | Standard VAT payable | Better option |
|---|---|---|---|
| A. IT consultant, sector rate 14.5%, low costs | £13,920 | £14,300 | Flat rate, by £380 |
| B. Same consultant, limited cost trader at 16.5% | £15,840 | £14,700 | Standard, by £1,140 |
| C. Business in a 12% sector with high costs | £14,400 | £10,000 | Standard, by £4,400 |
How the figures are worked out
Scenario A. Net sales of £80,000 plus £16,000 VAT gives flat rate turnover of £96,000. At 14.5% the flat rate bill is £13,920. The consultant spends £3,000 including VAT on relevant goods, which is above both 2% of turnover (£1,920) and £1,000, so the sector rate applies. On standard accounting, input VAT of £500 on those goods and £1,200 on services reduces the £16,000 output VAT to £14,300.
Scenario B. The same sales, but relevant goods of only £600 including VAT, so the 16.5% rate applies: £96,000 at 16.5% is £15,840. On standard accounting, input VAT of £1,300 leaves £14,700 to pay.
Scenario C. Net sales of £100,000 give flat rate turnover of £120,000, and 12% of that is £14,400. With £50,000 of standard rated purchases carrying £10,000 of VAT, standard accounting leaves £10,000 to pay.
The pattern is clear. The flat rate only wins where the sector rate is well below 16.5% and reclaimable VAT is small. Once your input VAT grows, standard accounting pulls ahead quickly.
Does the first year 1% discount change the answer?
Sometimes, but rarely by much. In your first year of VAT registration you can take 1% off your flat rate until the day before your first anniversary of registration. In Scenario B, that cuts the rate to 15.5% and the bill to £14,880, which is still £180 more than standard accounting. Do not join the scheme for the discount alone.
Can I reclaim VAT on equipment under the Flat Rate Scheme?
Generally not, with one exception. You can reclaim VAT on a single purchase of capital expenditure goods costing £2,000 or more including VAT, such as a piece of equipment. Everything else, including smaller equipment and all services, is covered by the flat rate. If you plan several capital purchases below £2,000 each, standard accounting may recover more.
Should I leave the Flat Rate Scheme?
Consider leaving if any of these apply:
- You have become a limited cost trader and are paying 16.5%.
- Your costs have risen, for example new premises, staff equipment or subcontracted work that carries VAT.
- A growing share of your sales is zero rated or exempt.
- Your total income, including VAT, in the last year was more than £230,000. At that point you must leave.
You can leave voluntarily at any time by telling HMRC, although most businesses leave at the end of a VAT period to keep the returns clean. You may also want to look at the VAT Cash Accounting Scheme, which works alongside standard accounting and helps cash flow.
Can I rejoin after leaving?
Not straight away. After leaving the scheme you cannot rejoin for 12 months, so check the numbers carefully before you switch.
Can the choice lead to an HMRC enquiry?
Yes. Getting the limited cost test wrong, using the wrong sector rate or claiming a capital asset that does not qualify can all prompt HMRC to review your VAT returns. Even a routine enquiry can mean a large accountant’s bill. Solar Protect tax investigation insurance covers up to £100,000 of accountant’s fees with no excess, including VAT enquiries. Get a quote, or browse our full accountancy and tax guide for more on VAT schemes.
Reviewed by Matthew Bartlett, Director, Solar Protect. Last reviewed 29 September 2026. This guide is general information, not personalised tax or financial advice. Figures are correct for the 2025/26 and 2026/27 UK tax years at the time of writing.