The flat rate scheme
How it works and whether it will benefit your business
The flat rate scheme simplifies VAT by replacing the standard output and input calculation with a single percentage applied to gross VAT-inclusive turnover.
How it works
Instead of paying the difference between output and input VAT, you pay a set percentage of your total gross turnover to HMRC. The percentage varies by sector. You still charge 20% VAT to customers but keep the difference between what you charge and what you pay to HMRC.
The limited cost trader rate
Most small service businesses are classified as limited cost traders (spending less than 2% of turnover on goods) and must use the 16.5% flat rate. At 16.5%, the scheme produces broadly the same or slightly worse result than standard accounting for most service businesses. Contact us and we can calculate whether the flat rate scheme is beneficial for your specific sector and cost structure.
💡 Good to know: The flat rate scheme was more beneficial before the limited cost trader rate was introduced. It now only genuinely helps businesses that buy significant goods (not services) as part of their work. We assess suitability for each client at VAT registration.
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