--- title: "Flat Rate VAT vs Standard VAT: Which Is Better? | HLS | HLS Accounts" description: "Flat Rate VAT or standard VAT? This plain English guide compares both schemes, with worked examples, so you can see which one saves your business more." canonical: "https://hlsaccounting.co.uk/blog/flat-rate-vat-vs-standard-vat" --- # Flat rate VAT vs standard VAT: which is better for your business? ![Smiling blonde woman with long hair wearing pink blazer and black top against dark vertical panels](/_next/image?url=%2Fapi%2Fmedia%2Ffile%2Fhannah-1-64x74.png%3Fv%3D1773230081541&w=128&q=75&dpl=dpl_DEc4fGhEc1SCRZZutzoEsRuDy1CJ) Hannah SimpsonChartered Accountant PublishedSunday, 8 February 2026 ![Smiling woman points to a sheet titled "VAT Tracker" while talking with a client in a salon](/_next/image?url=%2Fapi%2Fmedia%2Ffile%2Fwoman-holding-vat-tracker-salon.png%3Fv%3D1773236388760&w=1536&q=75&dpl=dpl_DEc4fGhEc1SCRZZutzoEsRuDy1CJ) The Flat Rate VAT Scheme pays HMRC a fixed percentage of your turnover instead of tracking VAT on every purchase. It is simpler, and for low-cost service businesses it can save real money. But for anyone buying significant goods or materials, standard VAT usually wins, and the limited cost trader rule has quietly turned the scheme into a bad deal for many who joined years ago. Here is how to tell which side you are on. ## How standard VAT accounting works Under [standard VAT accounting](https://www.gov.uk/how-vat-works/vat-schemes), you charge VAT on your sales, reclaim VAT on your purchases and expenses, and pay HMRC the difference. Collect £10,000 in VAT from customers, pay £3,000 in VAT on business costs, and you owe HMRC £7,000. The upside: you reclaim VAT on everything you buy for the business. The downside: every purchase needs tracking for its VAT content, which means more record keeping. ## How the Flat Rate VAT Scheme works Under the [Flat Rate Scheme](https://www.gov.uk/vat-flat-rate-scheme), you still charge customers 20% VAT as normal. But instead of reclaiming VAT on individual purchases, you pay HMRC a fixed percentage of your gross (VAT inclusive) turnover and keep the difference. The percentage varies by trade sector, from roughly 4% to 16.5% on [HMRC's published list](https://www.gov.uk/vat-flat-rate-scheme/how-much-you-pay). > **A worked example.** Your flat rate is 12% and your gross turnover including VAT is £120,000. You pay HMRC £14,400. You actually charged customers £20,000 in VAT, so you keep £5,600. Against that, you give up the right to reclaim VAT on most purchases. Whether you are ahead depends entirely on how much input VAT you walked away from. There is also a sweetener: in your first year of VAT registration you get a 1% discount on your sector rate. ## When the Flat Rate Scheme tends to save money The scheme works in your favour when your VATable costs are low relative to turnover, which is common in service businesses where the main cost is labour rather than materials or stock. It has often worked well for consultants and freelancers, IT contractors, marketing agencies, tradespeople with low material costs, and personal service businesses such as trainers and coaches. If your costs are low, you were never reclaiming much input VAT anyway. The flat rate lets you keep a slice of the VAT you collect without tracking every receipt. ## When the Flat Rate Scheme does not save money The scheme is less beneficial, and often more expensive, when your business buys significant goods or materials carrying VAT. Standard VAT lets you reclaim all of that input VAT, which quickly outweighs the flat rate benefit. Standard VAT often wins for retailers buying stock, builders and trades with high material costs, businesses making large equipment purchases, and anyone whose VATable purchases are a big share of costs. A direct comparison on your actual figures is the only reliable way to tell. Rules of thumb point you in a direction; the numbers decide. ## The limited cost trader rule This is where the scheme has gone wrong for a lot of businesses since 2017. > **The rule, as at June 2026:** if your spending on goods (not services) is less than 2% of your VAT inclusive turnover, or less than £1,000 a year, you are a limited cost trader and must use a flat rate of **16.5%** regardless of your sector. At 16.5% of gross turnover you are handing over almost all the VAT you collect while reclaiming nothing, so the scheme rarely saves money and often costs more than standard VAT. If you joined the Flat Rate Scheme before 2017 and have not reviewed it since, check this first. Service businesses with low goods spend, exactly the ones the scheme used to suit, are the ones the rule catches. Many are paying more VAT than they need to. A [VAT health check](https://hlsaccounting.co.uk/services/vat-health-checks) will flag it quickly. ## The record keeping difference Under the Flat Rate Scheme you keep records of your sales and the VAT charged, evidence of turnover for each period, and purchase records for any capital assets over £2,000 where VAT can still be reclaimed. Under standard VAT you keep all of that plus VAT receipts for every purchase you reclaim on, and a VAT account reconciling each period. For businesses with lots of small purchases the difference is real; for businesses with few purchases it is smaller than people expect, especially with [cloud bookkeeping](https://hlsaccounting.co.uk/services/cloud-bookkeeping-xero-quickbooks-sage) capturing receipts automatically. ## What about Making Tax Digital? Both schemes require [Making Tax Digital for VAT](https://hlsaccounting.co.uk/services/making-tax-digital-mtd-for-vat) compliance: digital records and returns submitted through [MTD compatible software](https://www.gov.uk/guidance/find-software-thats-compatible-with-making-tax-digital-for-vat). The Flat Rate Scheme does not exempt you from MTD. ## Can you switch between schemes? Yes. You can join the Flat Rate Scheme if your expected VATable turnover is £150,000 or less (excluding VAT), and you must leave once your total income exceeds £230,000 in the last twelve months. You can also choose to leave at any point if the scheme stops being beneficial. The timing of a switch needs handling correctly to avoid errors on your returns, so plan it with your accountant rather than mid quarter on a whim. Thresholds are correct as at June 2026; confirm the current position on the [HMRC eligibility page](https://www.gov.uk/vat-flat-rate-scheme/who-can-join). ## How to work out which scheme is right for you Run a direct comparison on your own figures. You need four things: - Your total VAT inclusive turnover for a recent period - The total VAT you paid on purchases and costs in that period - Your HMRC sector flat rate percentage - A check on whether the limited cost trader rule applies to you With those, you can calculate your VAT bill under both schemes and see which comes out lower. Your accountant can do this in minutes from recent VAT returns and bookkeeping records. ## Frequently asked questions ### What is the flat rate for my type of business? HMRC publishes the full sector list, running from 4% (retailing food, confectionery or newspapers) up to 14.5% for many professional services, with 16.5% for limited cost traders. Picking the right sector matters: it is your main business activity that counts, and using the wrong rate is one of the most common Flat Rate Scheme errors. ### Can I reclaim any VAT at all on the Flat Rate Scheme? Generally no, with one exception: capital assets costing £2,000 or more including VAT, bought in a single purchase. Day to day costs, services and smaller equipment cannot be reclaimed, which is exactly why the scheme suits businesses that do not buy much. ### Do I still charge my customers 20% on the Flat Rate Scheme? Yes. Your invoices look exactly the same as under standard VAT. The flat rate only changes what you pay over to HMRC, not what you charge. That gap between the 20% collected and the flat rate paid is where any saving comes from. ### Is the Flat Rate Scheme worth it for a salon? Often not any more. Hairdressing and beauty carries a 13% flat rate, and salons that mostly sell services with modest product spend can fall under the limited cost trader rule at 16.5%. Salons buying meaningful stock may do better reclaiming input VAT under standard accounting. It comes down to your product spend, which is a quick calculation to run. ## Ready to find out which scheme saves your business more? At HLS Accounts in Cardiff, we help businesses across South Wales work out whether the [Flat Rate VAT Scheme](https://hlsaccounting.co.uk/services/flat-rate-vat-scheme-advice) is still right for them. We run a like for like comparison on your real figures, check your sector rate and limited cost trader position, and give you a clear recommendation with practical next steps. [Book a free consultation](https://calendly.com/hlsaccounting/new-client-meeting) or call us on 02922 805941. 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