Complete Guide To The Flat Rate VAT Scheme For Small Businesses in 2025

Complete Guide To The Flat Rate VAT Scheme For Small Businesses in 2025

As a small business owner, the Flat Rate VAT scheme could make your life easier by simplifying your taxes and saving you money. Read on to find out if it’s the right choice for you.

First thing’s first: what’s VAT?

VAT stands for ‘Value Added Tax’, and is added to the cost of most goods and services in the UK. It’s known as a ‘consumption tax’, as it’s paid by the customer, rather than the business. Because VAT is percentage-based, the greater the cost of the service or item, the more the end consumer pays in VAT. In turn, the business pays the collected VAT to HMRC. 

The standard rate of VAT in the UK is 20%, though some goods and services are subject to a reduced rate, while some are exempt from VAT altogether. 

Who has to register for VAT?

In the UK, you have a legal obligation to register for VAT if your business has a taxable turnover of £90,000 from 1st April 2024. However, some small businesses choose to register for VAT voluntarily, because it enables them to claim back VAT on business purchases. If you’re a photographer and you buy a camera, for example, you could typically claim back 20% of the purchase price. 

What is the Flat Rate VAT Scheme?

The flat rate scheme was implemented in 2002 to simplify taxes for business owners. It's intended to ensure that you pay roughly the same amount of VAT (or sometimes less) without having to complete as much paperwork as other VAT schemes.

How does the Flat Rate VAT Scheme work?

In order to understand how the Flat Rate scheme works, let’s recap the process under the standard VAT scheme:

• When you sell goods or services, you typically charge VAT on top of the sale price. This is known as output VAT.
• When you buy goods or services for your business, you often pay VAT on those purchases. This is known as input VAT.
• Your VAT return calculates the amount of VAT due on sales (output), minus the amount of VAT you can reclaim on purchases (input). The resulting figure is the amount you owe HMRC, or HMRC owes you.

Here’s the difference under the Flat Rate VAT scheme:

• Instead of calculating VAT owed based on VAT charged on sales minus VAT reclaimed on purchases, you apply a fixed percentage to your total turnover, including VAT. This percentage is determined by HMRC based on the type of business you run, and can range between 4% and 14.5%.
• You then pay this predetermined amount to HMRC each quarter.
• This simplifies your VAT calculations and paperwork, making it easier to manage your finances.

For example, if your fixed rate is 10%, and your total turnover for a quarter is £10,000 including VAT, you'd pay £1,000 in VAT to HMRC (10% of £10,000). 

What are the disadvantages of the Flat Rate VAT Scheme?

Naturally, there's a trade-off: you can't reclaim VAT on most of your purchases (except for certain capital assets), which means you’ll have to carefully weigh up if the scheme is right for you. If the VAT on your purchases would exceed the VAT you charge on sales, then you’ll be worse off under the flat-rate scheme. 

To better understand, let’s look at two possible examples with two different outcomes: 

Martin, a photographer

Martin operates his own photography business and is registered under the Flat Rate VAT Scheme with a fixed rate of 13%. Martin's turnover for a quarter, including VAT, is £15,000. However, Martin has significant expenses such as camera equipment, studio rental, and travel costs.

Under the Flat Rate VAT Scheme, Martin's VAT payment to HMRC would be £1,950 for that quarter.

Despite his high turnover, Martin is not better off because his VAT payment is higher than what he would have paid under the standard VAT scheme due to his substantial expenses.

Samira, a freelance journalist

Samira is a freelance journalist who writes articles for various publications. She is registered under the Flat Rate VAT Scheme with a fixed rate of 12.5%. Samira's turnover for a quarter, including VAT, is £8,000. However, Samira has relatively low expenses as she mainly requires a computer, internet connection, and occasional travel for interviews.

Under the Flat Rate VAT Scheme, Samira's VAT payment to HMRC would be £1,000 for that quarter.

Samira is better off under the Flat Rate VAT Scheme because her VAT payment is less than she would have paid under the standard VAT scheme, considering her minimal expenses.

Who is eligible for the Flat Rate VAT Scheme? 

The scheme is available for VAT-registered businesses whose VAT taxable turnover (everything you intend to sell that is subject to VAT) is £150,000 or less. 

There are a few exceptions to this. For example, you can’t join if you’ve left the scheme in the past 12 months, or if you’ve committed a VAT offence in the past 12 months. 

You’ll need to leave the flat-rate VAT scheme if, on the anniversary of you joining, your turnover in the previous 12 months was more than £230,000. You’ll also need to leave if you expect your total income for the next 30 days alone to exceed £230,000 including VAT. 

How do I find out what my Flat Rate VAT percentage would be? 

As we mentioned above, different types of businesses are subject to different rates. For example, accountants and bookkeepers are subject to a 14.5% flat rate while mechanics must pay 8.5%. You can find a full breakdown on the gov.uk website. If you’re in your first year of VAT registration, you’ll also get a 1% reduction in your flat rate percentage until the day before the first anniversary you became VAT registered.

If your business fits into more than one category, you pick the one that applies to the majority of your sales. 

If your business is what’s known as ‘limited cost’, you will be subject to a flat rate of 16.5%, regardless of your industry. Limited cost means that your goods cost less than 2% of your turnover, or cost less than £1000 per year.