VAT Flat Rate Scheme: Rates, 16.5% Rule and Invoicing

The VAT Flat Rate Scheme lets small UK VAT-registered businesses with VAT taxable turnover of £150,000 or less pay HMRC a fixed percentage of their VAT-inclusive turnover instead of working out output tax minus input tax. You still charge customers the normal VAT rate, usually 20%, but you keep the difference between what you charge and what you pay.

The trade-off is that you generally cannot reclaim VAT on purchases. This guide explains who can join, the flat rate VAT percentages for common trades, the 16.5% limited cost trader rule, how to invoice correctly while on the scheme, and a worked example showing when it saves money and when it does not. Figures are taken from HMRC guidance at the time of writing (October 2026).

Important: this is general information, not tax advice. Whether the scheme suits you depends on your costs and customers, so check with a qualified accountant or tax adviser before applying.

How the VAT Flat Rate Scheme works

Under standard VAT accounting, each return shows the VAT you charged on sales (output tax) minus the VAT you paid on business purchases (input tax). That means tracking VAT on every receipt. The Flat Rate Scheme replaces this with one sum: your VAT-inclusive turnover for the period multiplied by the flat rate for your business type.

Three points catch people out:

• The rate applies to gross turnover. You multiply the flat rate by turnover including the VAT you charged, not by the net figure.
• Customers see no difference. Your invoices still show 20% (or the relevant rate), and VAT-registered customers reclaim it as normal.
• Input VAT is mostly lost. You cannot reclaim VAT on purchases, except on capital assets costing £2,000 or more including VAT in a single purchase.

The scheme was designed to cut paperwork for small businesses. For some trades it also saves money, because the flat rate is set below the average net VAT a business in that sector would pay. For others, especially service businesses with few costs, the saving has largely disappeared since the limited cost trader rule arrived in April 2017.

Who can join the VAT Flat Rate Scheme and when you must leave

You can apply to HMRC to join the VAT Flat Rate Scheme if you are VAT registered and expect your VAT taxable turnover (excluding VAT) in the next 12 months to be £150,000 or less. If you are not yet registered, you can apply at the same time as registering. Our guide to the UK VAT registration threshold explains when registration becomes compulsory.

You cannot join if, among other things, you:

• left the scheme in the previous 12 months
• committed a VAT offence, or were charged a penalty for VAT evasion, in the previous 12 months
• are closely associated with another business, for example a business run by a connected person that shares resources
• use a margin scheme or the capital goods scheme
• joined a VAT group or registered for VAT as a division

Once in, you must leave if your total income, including VAT and any exempt or non-VAT income, was more than £230,000 in the last 12 months, or you expect it to exceed £230,000 in the next 30 days. You can also leave voluntarily by writing to HMRC, but you then have to wait 12 months before rejoining. When you leave, you return to normal VAT accounting from the start of the next period, and you may need to make adjustments for stock and assets.

Flat rate VAT percentages by business type

HMRC publishes a list of flat rate VAT percentages for around 55 business categories. You choose the one that best describes your main business activity, based on where most of your turnover comes from. Here are the rates for some common trades, from the GOV.UK table at the time of writing:

Business type	Flat rate
Accountancy or book-keeping	14.5%
Computer and IT consultancy or data processing	14.5%
Lawyer or legal services	14.5%
Management consultancy	14%
Architect, civil and structural engineer or surveyor	14.5%
Labour-only building or construction services	14.5%
General building or construction services	9.5%
Hairdressing or other beauty treatment services	13%
Film, radio, television or video production	13%
Entertainment or journalism	12.5%
Catering services, including restaurants and takeaways	12.5%
Business services not listed elsewhere	12%
Any other activity not listed elsewhere	12%
Advertising	11%
Photography	11%
Publishing	11%
Transport or storage, including couriers and taxis	10%
Retailing not listed elsewhere	7.5%
Retailing food, confectionery, tobacco, newspapers or children's clothing	4%
Limited cost trader (any sector)	16.5%

Rates do change. Several hospitality rates were cut temporarily between 2020 and 2022, so always check the current GOV.UK table before you calculate a return. Labour-only building means building work where materials are less than 10% of turnover; above that, the general building rate applies.

The 1% first-year discount

If you are in your first year of VAT registration, you can reduce your flat rate by 1% until the day before the first anniversary of becoming VAT registered. A photographer on 11% would use 10% for that period. The discount is linked to your registration date, so joining the scheme later in your VAT life does not give you a fresh year.

The limited cost trader 16.5% rule

Since April 2017, any business that spends very little on goods pays a flat rate of 16.5%, regardless of its sector. You are a limited cost trader for a VAT period if your spending on relevant goods, including VAT, is either:

• less than 2% of your VAT-inclusive turnover in the period, or
• more than 2% of turnover but less than £1,000 a year (£250 for a quarterly period)

You test this every VAT period, so you can move in and out of the limited cost trader rate as your spending changes.

What counts as relevant goods

Relevant goods are goods used exclusively for your business. Services never count. HMRC also excludes:

• capital expenditure, such as laptops, cameras and machinery
• food and drink for you or your staff
• vehicles, vehicle parts and fuel, unless you run a transport business using your own or a leased vehicle
• goods for resale, leasing, letting or hiring out, unless that is your main business
• goods you give away or use for promotions

Things that usually do count include stationery, printer ink, cleaning materials and stock or raw materials for a trade that uses them. Software you download, phone contracts, rent, accountancy fees and subcontractors are services, so they do not count. This is why most freelance consultants, developers and designers end up classed as limited cost traders.

Do not buy goods you do not need just to pass the test. HMRC is aware of this tactic, and spending £1,000 to save a few hundred pounds of VAT makes no commercial sense anyway.

Worked example: is the scheme worth it?

Priya is an IT consultant. Her annual sales are £60,000 before VAT. She charges 20% VAT, so her VAT-inclusive turnover is £72,000 and she collects £12,000 of VAT from clients. Her business costs carry £800 of VAT she could reclaim under standard accounting.

Method	Calculation	VAT paid to HMRC	VAT kept
Standard VAT accounting	£12,000 output minus £800 input	£11,200	£0 (but reclaims £800)
Flat rate, IT consultancy 14.5%	£72,000 x 14.5%	£10,440	£1,560
Flat rate, first year 13.5%	£72,000 x 13.5%	£9,720	£2,280
Limited cost trader 16.5%	£72,000 x 16.5%	£11,880	£120

If Priya buys enough relevant goods to use the 14.5% rate, she pays £760 less than under standard accounting (£11,200 minus £10,440). But her spending is mainly on software and services, so she is almost certainly a limited cost trader. At 16.5% she pays £11,880, which is £680 more than standard accounting. For her, the scheme only makes sense if she values the simpler records more than £680 a year.

Now take Tom, a general builder with the same £72,000 VAT-inclusive turnover who buys plenty of materials. At 9.5% he pays £6,840. If his materials carry, say, £3,000 of input VAT, standard accounting would cost £9,000 (£12,000 minus £3,000), so the scheme saves him £2,160. If his input VAT were £6,000, standard accounting would cost £6,000 and the scheme would cost him £840 more. The answer depends on your real cost base, so test both methods with last year's figures.

How to invoice on the Flat Rate Scheme

Being on the scheme does not change how your invoices look. You must still issue a valid VAT invoice to VAT-registered customers, and it must show the normal VAT rate for the goods or services supplied. Our VAT invoice guide covers the full list, but in short a full VAT invoice includes:

1. a unique, sequential invoice number (our invoice number generator can help you keep a clean sequence)
2. your business name, address and VAT registration number
3. the invoice date and the time of supply (tax point) if different
4. the customer's name and address
5. a description of what you supplied, with quantity and unit price
6. the VAT rate charged, normally 20%, and the net amount for each rate
7. the total amount excluding VAT, the total VAT and the total payable

The common mistake is printing your flat rate, such as 14.5%, as the VAT rate. That is wrong. The customer must be charged and shown the real VAT rate so they can reclaim it. Nothing on the invoice needs to mention that you use the Flat Rate Scheme.

For example, Priya bills a client £2,500 for a month of consultancy. Her invoice shows net £2,500, VAT at 20% of £500 and a total of £3,000. On her VAT return, that £3,000 is added to her flat-rate turnover. If you work as a sole trader, our sole trader invoice guide for the UK shows how to lay out your details.

Our free UK invoice generator lets you add your VAT number, set the 20% rate, and download a PDF. It applies one tax rate per invoice, so if a single sale mixes standard-rated and zero-rated items, issue separate invoices or check how your accounting software handles mixed rates.

Filling in your VAT return on the scheme

The VAT return boxes work slightly differently when you use flat rate VAT:

• Box 1: your VAT-inclusive turnover multiplied by your flat rate, plus any VAT due on acquisitions or reverse charge supplies
• Box 4: normally zero, except for VAT reclaimed on capital assets of £2,000 or more
• Box 6: your flat-rate turnover, including VAT
• Box 7: purchases excluding VAT, as normal

Returns must be filed through Making Tax Digital-compatible software. The step-by-step process is in our guide on how to file a VAT return in the UK. You can choose to calculate turnover on a cash basis (money received in the period) or on the basic method (invoices issued), and the scheme can be combined with the Annual Accounting Scheme.

Pros and cons of the VAT Flat Rate Scheme

Advantages	Disadvantages
One calculation per return, less record keeping of input VAT	No input VAT reclaim on most purchases
Can save money in sectors with low flat rates	Limited cost traders at 16.5% usually lose money
1% discount in the first year of VAT registration	The gain is taxable business income
Cash-based turnover option helps cash flow	Zero-rated and exempt sales still count in turnover at the flat rate

That last point matters for anyone with large zero-rated or exempt sales, such as exports. Those sales are still included in flat-rate turnover, so you pay a percentage on income that carries no VAT. In that situation the scheme can be costly.

Common mistakes to avoid

• Applying the flat rate to net sales instead of VAT-inclusive turnover.
• Forgetting to test the limited cost trader rule every period.
• Claiming the 1% discount after the first anniversary of VAT registration.
• Choosing a sector with a lower rate that does not match your main activity.
• Showing the flat rate on invoices instead of the standard VAT rate.
• Staying in the scheme after income passes £230,000.

If you are deciding between business structures as well as VAT schemes, our comparison of sole trader vs limited company covers the wider tax picture, and the VAT cash accounting scheme is the other main option for smaller businesses.

Conclusion

The VAT Flat Rate Scheme still suits businesses that buy plenty of goods or work in sectors with low rates, and it simplifies record keeping for everyone. But for many service-based freelancers, the 16.5% limited cost trader rate wipes out the benefit. Run the numbers for both methods using real figures, and take advice if the result is close. Whatever scheme you use, your invoices should always show the real VAT rate. Create a compliant VAT invoice in a couple of minutes with our free invoice generator.