VAT Flat Rate Scheme — Is It Worth It?
The VAT Flat Rate Scheme lets eligible small businesses pay a single percentage of their gross turnover as VAT rather than accounting for VAT on every transaction. For some freelancers it is a genuine money-saver. For others it costs more than the standard scheme.
Calculate whether the flat rate scheme saves you money.
Use our VAT calculator →How the VAT Flat Rate Scheme works
Under the standard VAT scheme, you charge clients 20% VAT, reclaim VAT on business purchases (input tax) and pay the difference to HMRC. If you buy little, you pay most of what you collect to HMRC.
Under the Flat Rate Scheme (FRS), you still charge clients the standard 20% VAT rate on invoices. But instead of accounting for input and output tax separately, you pay HMRC a fixed percentage of your gross turnover (VAT-inclusive). The difference between what you collect and what you pay is yours to keep.
Worked example: You invoice a client £10,000 plus VAT (£2,000), so the client pays £12,000. Under FRS at 14.5%, you pay HMRC £12,000 × 14.5% = £1,740. You collected £2,000 in VAT and keep £260. Under the standard scheme with no purchases to reclaim, you would pay the full £2,000 to HMRC and keep nothing.
Who can join the Flat Rate Scheme
To join the FRS you must:
- Be VAT registered
- Have taxable turnover of £150,000 or less (excluding VAT) in the next 12 months
- Not have left the scheme in the previous 12 months
- Not be ineligible due to certain past VAT offences or being part of a VAT group
You must leave the scheme if your VAT-inclusive turnover exceeds £230,000 in the previous 12 months (or is expected to in the next 12 months). You can also leave voluntarily at any time.
Flat rate percentages by industry
HMRC assigns a flat rate percentage to each business sector. The rates below are the most relevant for freelancers and contractors — confirm your exact category on gov.uk/vat-flat-rate-scheme.
| Industry | Flat rate % |
|---|---|
| Computer and IT consultancy or data processing | 14.5% |
| Management consultancy | 14.0% |
| Architect, civil and structural engineer or surveyor | 14.5% |
| Lawyer or legal services | 14.5% |
| Financial services | 13.5% |
| Advertising | 11.0% |
| Photography | 11.0% |
| Entertainment or journalism | 12.5% |
| Business services not listed elsewhere | 12.0% |
| Secretarial services | 13.0% |
| Film, radio, television or video production | 11.5% |
| General building or construction services | 9.5% |
| Limited cost trader (see below) | 16.5% |
Newly VAT-registered businesses receive a 1% discount on their flat rate for the first 12 months of registration.
The limited cost trader rate — a critical catch
Since April 2017, HMRC applies a higher flat rate of 16.5% to limited cost traders. You are a limited cost trader if your VAT-inclusive spending on goods is either:
- Less than 2% of your VAT-inclusive turnover, or
- Less than £1,000 per year (pro-rated for periods under 12 months)
The critical distinction is goods vs services. Goods are physical items — office stationery, printer ink, hardware. Services are not counted — and this includes software subscriptions, cloud hosting, accountancy fees, insurance, phone bills and subcontractor costs.
Most IT contractors and knowledge-based freelancers are limited cost traders because their main business costs are services, not goods. At 16.5%, the FRS saving is minimal:
Example: £10,000 invoice + £2,000 VAT = £12,000 gross
FRS at 16.5%: pay HMRC £1,980 — keep £20
Standard scheme (no input tax): pay HMRC £2,000 — keep £0
IT contractors: If your main costs are a laptop, software subscriptions and accountancy fees, you are almost certainly a limited cost trader. Software and professional fees are services, not goods. The 14.5% IT consultancy rate does not apply to you — you must use 16.5%. Many contractors join FRS expecting a meaningful saving and find it is negligible.
Is the Flat Rate Scheme worth it for you?
When FRS is worth it:
- You have few VAT-able purchases to reclaim (low input tax)
- Your industry flat rate is well below 16.5% and you are not a limited cost trader
- You are in your first year of VAT registration and benefit from the 1% discount
When FRS is not worth it:
- You are a limited cost trader (most IT consultants and freelancers)
- You buy significant goods or equipment with VAT — the standard scheme lets you reclaim input tax
- You make exempt or zero-rated supplies that complicate the calculation
Worked example — IT consultant
An IT consultant with £80,000 ex-VAT annual turnover (£96,000 VAT-inclusive). Main costs: software subscriptions (£3,000/year), accountancy (£1,500/year), laptop (£1,200 every three years). No significant goods purchases.
Step 1 — Check limited cost trader status:
- Goods purchased: ~£400/year (stationery, occasional hardware)
- £400 ÷ £96,000 = 0.4% — below the 2% threshold
- Result: limited cost trader — must use 16.5% rate
Step 2 — Calculate FRS vs standard scheme:
| Item | Standard scheme | FRS (16.5%) |
|---|---|---|
| VAT charged to clients (20%) | £16,000 | £16,000 |
| VAT reclaimed on purchases | ~£800 | £0 |
| VAT paid to HMRC | £15,200 | £15,840 |
| Net VAT benefit | £800 reclaimed | £160 kept |
Under the standard scheme, reclaiming input VAT on software and services saves £800/year. Under FRS as a limited cost trader, the benefit is only £160/year — and you lose the ability to reclaim input tax. The standard scheme wins by £640/year in this example.
Run the numbers for your turnover and industry.
Open the VAT calculator →How to join the Flat Rate Scheme
You can apply online when you register for VAT, or afterwards through your VAT online account. You can also apply by post using form VAT600FRS.
HMRC will confirm your flat rate percentage based on your business sector. Remember the 1% first-year discount — if you join in your first 12 months of VAT registration, your rate is reduced by 1 percentage point.
Leaving the Flat Rate Scheme
You can leave voluntarily at any time by writing to HMRC. You must leave if your VAT-inclusive turnover exceeds £230,000 in the previous 12 months. When you leave, you switch to the standard VAT scheme and can reclaim input tax on purchases from that point — but not retrospectively for the period you were on FRS.
Frequently asked questions
Can I reclaim VAT on purchases under the Flat Rate Scheme?
Generally no. Under the FRS you cannot reclaim input VAT on most purchases. The exception is capital assets costing more than £2,000 including VAT.
What is the first year discount on the Flat Rate Scheme?
HMRC gives newly VAT-registered businesses a 1% reduction in their flat rate for the first 12 months. An IT consultant on 14.5% would pay 13.5% in their first year.
How do I know if I am a limited cost trader?
Calculate your VAT-inclusive goods purchases as a percentage of VAT-inclusive turnover. If below 2% or below £1,000 per year, you are a limited cost trader and must use the 16.5% rate. Software subscriptions are services not goods.
Can I use the Flat Rate Scheme as a sole trader?
Yes. The FRS is available to sole traders, partnerships and limited companies — any VAT-registered business with taxable turnover below £150,000.
Does the Flat Rate Scheme affect my invoices?
No. You still charge clients the standard 20% VAT rate and issue standard VAT invoices. The FRS only changes how much of the collected VAT you pay to HMRC.
This guide is for general information only and does not constitute tax advice. Flat rate percentages and eligibility rules can change. Always verify at gov.uk or with a qualified accountant before joining or leaving the scheme.