10 February 2026 · 6 min read · Bruce Thomas
Under standard VAT accounting you charge VAT, reclaim VAT on purchases, and pay the difference. Under the Flat Rate Scheme you still charge VAT normally, but you pay HMRC a fixed percentage of your gross turnover and generally cannot reclaim VAT on purchases.
Why it existed
It was designed as a simplification for smaller businesses, and for service businesses with very few costs it often produced a genuine saving as well as less admin.
The limited cost trader rule
A higher flat rate applies to businesses whose spending on goods is very low relative to turnover. Because that describes most consultants, contractors and other service businesses, the scheme stopped being automatically attractive for exactly the group that used it most.
The test looks at goods, not services — so software subscriptions, professional fees and subcontractors typically do not help you pass it.
Who it can still suit
- Businesses with modest turnover and genuinely low, mostly non-recoverable costs
- Businesses that value predictability and simpler quarterly admin over the last few pounds
- Businesses whose sector percentage happens to sit favourably against their real cost profile
Who it rarely suits
- Anyone with significant VAT-bearing purchases, stock or equipment spend
- Businesses planning a large capital purchase in the near future
- Businesses making zero-rated or exempt supplies, where the flat rate applies to turnover that carried no VAT
How to decide
Do not decide on the headline percentage. Take four recent quarters of real figures and calculate the VAT payable both ways. If the difference is small, weigh the admin saving; if standard accounting wins clearly, stay put.
Digital record keeping under Making Tax Digital has also narrowed the admin advantage, since the underlying bookkeeping has to be done either way.
This article is general guidance for business owners in the UK and does not amount to advice for your particular circumstances. Tax rules change and the right answer depends on your figures — please take specific advice before acting.
