Guide
The Flat Rate VAT Scheme: is it still worth it?
How the scheme works, why the 16.5% limited cost trader rate catches most contractors, and worked examples against standard VAT.
The Flat Rate VAT Scheme lets small businesses pay HMRC a fixed percentage of their VAT-inclusive turnover instead of working out VAT on every sale and purchase. For contractors it used to be a small but reliable bonus. Since the “limited cost trader” rate arrived, it rarely is. Here’s how to tell whether it still works for you in 2026/27.
How the scheme works
You still charge clients 20% VAT as normal. But instead of paying HMRC the VAT you charge minus the VAT on your costs, you pay a flat percentage of your total VAT-inclusive turnover, and you generally can’t reclaim VAT on purchases (except some capital items over £2,000). The percentage depends on your business sector: 14.5% for computer and IT consultancy, for example.
You can join if you expect your VAT-exclusive taxable turnover in the next 12 months to be £150,000 or less, and you must leave once your total income goes over £230,000. In your first year of VAT registration you get a 1% discount on your flat rate.
The limited cost trader rule
Most contractors are limited cost traders, which means a flat rate of 16.5% whatever your sector. You’re one if your spending on goods (not services) in a VAT period is either:
- less than 2% of your VAT-inclusive turnover, or
- more than 2% but less than £1,000 a year (£250 a quarter).
Goods exclude capital items, food and drink, vehicles and fuel, and services like accountancy, software subscriptions, phone contracts and travel. So a typical consultant spending mostly on services is caught. The test is applied every VAT period, so check it each time.
At 16.5% of VAT-inclusive turnover, you pay HMRC 19.8% of your net invoices, almost all of the 20% VAT you charged, and you can’t reclaim anything. That’s why the scheme rarely pays off any more.
Worked examples
| Scenario | VAT charged | Standard | Flat Rate 16.5% | Flat Rate 14.5% |
|---|---|---|---|---|
| £8,000/month, few costs | £19,200 | £18,720 | £19,008 | £16,704 |
| £10,000/month, few costs | £24,000 | £23,280 | £23,760 | £20,880 |
| £12,000/month, few costs | £28,800 | £28,080 | £28,512 | £25,056 |
| £10,000/month, £300/month VAT on costs | £24,000 | £20,400 | £23,760 | £20,880 |
The 14.5% column is the IT consultancy rate, which only applies if you aren’t a limited cost trader. Lower is better. “Standard” is the VAT you charge minus the VAT on your costs.
Other things to weigh up
- Admin. The Flat Rate Scheme is simpler: no need to track VAT on each purchase. If the cost difference is small, simplicity may be worth it.
- Taxable profit. Any VAT you keep under the Flat Rate Scheme is income for your company and is subject to corporation tax.
- Leaving. You can leave the scheme at any time by telling HMRC, but can’t rejoin for 12 months.
- Registering at all. You must register for VAT once your taxable turnover goes over £90,000 in a rolling 12 months. Below that, registration is optional, and if your clients are VAT-registered businesses it usually costs them nothing extra.
This guide is general information, not financial or tax advice. Figures are estimates for England, Wales and Northern Ireland; speak to an accountant before making decisions.