Flat Rate VAT Scheme: Is It Still Worth It?
- JSC Accounting Team
- Oct 7
- 2 min read
The Flat Rate VAT Scheme (FRS) was designed to make VAT simpler for small businesses, and for many years it did. But after rule changes and threshold updates, some companies find it less beneficial than before. Here’s how to decide if it still makes sense for you.
How the flat rate scheme works
Normally, VAT-registered businesses charge 20% VAT to customers, reclaim VAT on their expenses, and pay the difference to HMRC.
Under the flat rate scheme, you instead pay a fixed percentage of your total turnover to HMRC, keeping the difference between what you charge and what you owe.
Each type of business has its own flat-rate percentage. For example, accountants pay 14.5%, consultants 14%, and catering businesses 12.5%. The idea is to simplify VAT returns and save time.
The “limited cost trader” rule
In 2017, HMRC introduced the limited cost trader rule, which applies a 16.5% rate if your business spends very little on goods. This rule caught many service-based businesses (like consultants or digital marketers) by surprise and reduced the savings they previously enjoyed.
If you buy mostly software, subscriptions, or services rather than physical goods, you’re likely classed as a limited cost trader, which often makes the flat-rate scheme less attractive.
Who still benefits
The Flat Rate Scheme can still work well if:
You spend very little time on admin and want easier VAT returns.
Your business has moderate expenses and fits a low-rate category.
You’re just starting out and value simplicity over marginal savings.
You also receive a 1% discount on your flat rate during your first year of VAT registration.
When it’s time to switch
If your expenses are significant (for example, you buy stock, equipment, or pay subcontractors with VAT), you may be better off on standard VAT accounting. You’ll likely reclaim more VAT than you pay under the flat-rate percentage.
You can leave the scheme at any time, and you must do so if your turnover exceeds £230,000.
The simple takeaway
The flat-rate scheme can still be useful, but only for certain types of small businesses. Always review your numbers each year to check whether it’s saving you money or costing you extra.
Need help making sense of your taxes? JSC Accounting works with small businesses across the UK to keep things simple and compliant. Get in touch for a friendly chat about how we can help.
