Flat Rate VAT vs standard
The Flat Rate Scheme charges a set percentage of VAT-inclusive turnover instead of standard 20% VAT accounting, rising to 16.5% for limited cost traders, and is open only up to £150,000 turnover, under gov.uk's VAT Flat Rate Scheme guidance. This tool compares the two schemes on your own figures.
How do the Flat Rate Scheme and standard VAT compare?
| Line | Flat Rate Scheme | Standard |
|---|---|---|
| VAT charged to customers | £12,000 | £12,000 |
| Paid to HMRC | £10,440 | £11,000 |
| Input VAT reclaimed | None | £1,000 |
| You keep | £1,560 | £1,000 |
How is the Flat Rate Scheme worked out?
Under both schemes you charge customers the standard 20%, so the VAT they pay you is the same. The difference is what you hand to HMRC. On the Flat Rate Scheme you pay a flat percentage of your gross turnover, meaning turnover plus the VAT you added, and you keep the gap between the VAT you charged and that flat payment. You cannot reclaim VAT on purchases except for large capital assets. Under standard accounting you pay the VAT you charged minus the VAT on everything you bought, so the money you keep is simply the input VAT you reclaim.
The scheme rewards businesses that spend little on standard-rated goods, because they give up a reclaim that was small anyway while keeping a share of the flat rate margin. Once you are classed as a limited cost trader the rate jumps to 16.5%, which on a 20% charge leaves almost nothing, so the scheme rarely pays for service-only businesses after the first-year discount ends.
What would I pay on an example turnover?
On £60,000 of turnover you charge £12,000 of VAT. At a 14.5% flat rate you pay HMRC £10,440 and keep £1,560. Under standard accounting you reclaim £1,000 on £5,000 of costs, so you keep £1,000. That makes the flat rate scheme better by £560, before you account for the tax due on any flat rate surplus.
Common questions
How does the Flat Rate Scheme work?
You still charge your customers 20% VAT, but instead of paying HMRC that VAT minus your input VAT, you pay a single flat percentage of your gross, VAT-inclusive turnover. You keep the difference between the VAT you charged and the flat amount you hand over. In return you give up the right to reclaim VAT on most purchases.
What is the 16.5% limited cost trader rate?
It is an anti-avoidance rate. If your spending on goods is less than 2% of turnover, or less than £1,000 a year, you are a limited cost trader and must use 16.5% whatever your sector rate would be. Most consultants and labour-only contractors fall into this, which wipes out almost all of the flat rate benefit.
Is the flat rate scheme worth it on £60,000 turnover?
At £60,000 turnover with a 14.5% sector rate and £5,000 of reclaimable costs, the flat rate scheme comes out ahead by about £560 a year. The answer changes as soon as your reclaimable costs rise or the limited cost rate applies.
Is the flat rate surplus taxable?
Yes. Anything you keep from the scheme, the gap between the VAT you charged and the flat amount you paid, counts as income and is taxed as profit. So the headline saving is not all yours; deduct your income tax or corporation tax rate to see the real benefit.
When does standard VAT accounting win?
Standard accounting is better when you buy a large volume of standard-rated goods or services, because you reclaim the VAT on all of it. Trades with real material costs, or anyone making large equipment purchases, are usually better off standard. The scheme suits low-cost, service-heavy businesses on a generous sector rate.
How do the Flat Rate Scheme and standard VAT compare?
Under both schemes customers pay the same standard VAT. Under the Flat Rate Scheme you pay HMRC a flat percentage of gross turnover and keep the rest, with no input VAT reclaim. Under standard accounting you pay the VAT charged minus the VAT you reclaim on purchases, so what you keep is the reclaim itself.
How is the Flat Rate Scheme worked out?
The flat percentage is applied to turnover including the VAT you charged, not the net figure, and is paid to HMRC in place of the usual output-minus-input calculation. Limited cost traders must use 16.5% regardless of their sector rate, which usually removes most of the benefit for service businesses.
What would I pay on an example turnover?
On £60,000 of turnover the estimated VAT charged is £12,000. Under the Flat Rate Scheme at 14.5% the estimated amount kept is £1,560, against £1,000 kept under standard accounting, a difference of about £560.
Sources & Rate Verification
Rates verified against official statutory guidance on 6 September 2026.