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Flat Rate or Standard: which saves you more?
A rough comparison. It assumes your sales are standard-rated at 20%. "Goods" means goods used only in your business, not services, capital items, food and drink, or vehicles and fuel. Not advice.
How Standard VAT accounting works
Most VAT-registered businesses use standard accounting. You charge VAT on your sales (output VAT) and reclaim VAT on your business costs (input VAT). You pay HMRC the difference, or HMRC repays you if your input VAT is higher.
Example: a business sells £50,000 plus £10,000 VAT and buys £20,000 plus £4,000 VAT of supplies. It pays HMRC £10,000 − £4,000 = £6,000.
You need a valid VAT invoice for every cost you reclaim, and digital records of your sales and purchases under Making Tax Digital.
Worked example
An IT consultant on £50,000 a year
The consultant charges £50,000 plus £10,000 VAT, so £60,000 including VAT. It pays £1,500 VAT a year on costs, and spends £600 on goods.
Standard: £10,000 − £1,500 = £8,500 to HMRC.
Flat Rate at 14.5%: £60,000 × 14.5% = £8,700. But its goods of £600 are less than 2% of its turnover (£1,200), so it is a limited cost business and must use 16.5%: £9,900.
Here Standard is £1,400 a year cheaper. If it spent £1,500 on goods, it would not be a limited cost business and would pay 14.5% (£8,700), but Standard would still be £200 cheaper.
How the Flat Rate Scheme works
On the Flat Rate Scheme you still charge your customers VAT at the normal rate, but you pay HMRC a fixed percentage of your turnover including VAT. The percentage depends on your type of business, from 4% to 14.5%, or 16.5% for limited cost businesses.
- The percentage applies to all your turnover including VAT, including any zero-rated and exempt sales.
- You cannot reclaim VAT on costs, except on certain capital assets, such as equipment, costing more than £2,000 including VAT.
- First-year discount: you take 1% off your flat rate until the day before the first anniversary of your VAT registration.
- Joining: you can join if you expect your taxable sales in the next 12 months to be £150,000 or less, before VAT.
- Leaving: you must leave if your turnover including VAT was more than £230,000 in the last 12 months, or you expect it to be in the next 12 months, or you expect more than £230,000 in the next 30 days alone.
- Cash accounting: you cannot use the Flat Rate Scheme with the Cash Accounting Scheme, but the Flat Rate Scheme has its own cash-based way of working out turnover.
See every rate on GOV.UK's flat rate table.
The limited cost business test (16.5%)
You are a limited cost business, and must use 16.5% instead of your sector rate, if the goods you buy for the period cost less than either:
- 2% of your turnover including VAT, or
- £1,000 a year (£250 a quarter), if they are more than 2%
Only goods used solely for your business count. Services do not, and neither do capital items, food and drink for you or your staff, or vehicles and fuel (unless you run a transport business). So a consultant who mostly buys software, phone contracts and training will usually be a limited cost business.
You check this every VAT period. HMRC has an online limited cost business checker.
Key differences between the two schemes
| Standard VAT | Flat Rate Scheme | |
|---|---|---|
| What you pay HMRC | VAT on sales minus VAT on costs | A fixed % of turnover including VAT |
| Reclaiming VAT on costs | Yes, on most business costs | Only on capital items over £2,000 |
| Records | Digital records of sales and purchases | Digital records of sales, and of goods for the 16.5% test |
| Who can use it | Any VAT-registered business | Taxable sales of £150,000 or less to join |
| Usually suits | Businesses with significant VAT on costs, stock or equipment | Low-cost businesses that also buy enough goods to avoid 16.5% |
Which scheme suits your business
Flat Rate can work well for businesses with few VAT-able costs that are not limited cost businesses, for example some retailers, hairdressers, photographers or builders who buy materials, especially in the first year with the 1% discount.
Standard is usually better for businesses with significant VAT on costs, stock or equipment, for those that often get VAT repayments, and for most consultants and freelancers, who are often limited cost businesses at 16.5%.
Flat Rate also means less to work out each quarter, but the extra VAT you might pay can outweigh the time saved. Use the calculator above with your own figures.
Filling in your VAT return on each scheme
- Standard: Box 1 is the VAT on your sales, Box 4 the VAT on your costs, Box 6 your sales before VAT and Box 7 your purchases before VAT.
- Flat Rate: Box 1 is your flat rate percentage of your turnover including VAT, and Box 6 is that turnover including VAT. Box 4 and Box 7 are usually 0, unless you reclaim VAT on a capital asset over £2,000.
Both are the same nine-box return, filed through Making Tax Digital software. See HMRC's VAT Notice 700/12 for the full rules.
Switching between schemes
- To join the Flat Rate Scheme, you apply to HMRC.
- You can leave at any time by telling HMRC, but you cannot rejoin for 12 months.
- You must leave if you are no longer eligible, for example if your turnover including VAT goes over £230,000.
Review your figures each year, as a change in your costs can change which scheme is cheaper.
Flat Rate or Standard, file your VAT return from £5 a month
Whichever scheme you use, your VAT return is the same nine boxes, sent to HMRC through Making Tax Digital software. Swift VAT Pro files it from the totals in your spreadsheet.
- Work out your boxes. On the Flat Rate Scheme, Box 1 is your flat rate percentage of your VAT-inclusive turnover and Box 6 is that turnover.
- Upload your nine box totals as a CSV. Swift VAT Pro works out Box 3 and Box 5.
- Check the return on one screen.
- Submit to HMRC and keep the receipt.
No card needed · From £5 a month · Filing through HMRC's MTD service since 2019
Final thoughts
Flat Rate is simpler, but it is not always cheaper. Check whether you are a limited cost business, compare both schemes with your own figures, and review the choice each year. Whichever you use, your VAT return still goes to HMRC through MTD software.
Disclaimer: This guide gives general information, not advice for your business. If you are unsure how the rules apply to you, speak to an accountant or contact HMRC.
Frequently asked questions
Checked against GOV.UK "VAT Flat Rate Scheme" (including the flat rate table and limited cost business test), HMRC VAT Notice 733 and VAT Notice 700/12. November 2026.
What is the difference between the Flat Rate Scheme and standard VAT?
Who can join the VAT Flat Rate Scheme?
What is a limited cost business?
How do I fill in my VAT return on the Flat Rate Scheme?
Does the 1% Flat Rate discount apply in my first year?
Is the Flat Rate Scheme always cheaper?
Flat Rate or Standard, file your VAT return from £5 a month.
Swift VAT Pro files your return to HMRC from the spreadsheet you already keep. From £5 a month.
No card needed · 2,900+ VAT returns filed since 2019