The Flat Rate Scheme lets a small business pay VAT as a fixed percentage of its total (VAT-inclusive) turnover, instead of the usual method of tracking VAT charged on sales minus VAT reclaimed on purchases. The percentage depends on your trade sector and is set by HMRC.
How it differs from standard VAT accounting
You still charge customers VAT at the normal rate (usually 20%) on your invoices
But instead of paying HMRC the difference between VAT charged and VAT reclaimed on purchases, you pay a fixed percentage of your gross turnover
You generally cannot reclaim VAT on purchases (with an exception for larger capital assets over £2,000)
Bookkeeping is simpler because you are not tracking input VAT on every purchase
Who it tends to suit
Service-based businesses with low VAT-able expenses - consultants, many tradespeople whose main cost is their own labour rather than materials, and similar - often come out ahead on the Flat Rate Scheme, because they have little input VAT to reclaim anyway under standard accounting. Businesses that buy a lot of VAT-able stock or equipment usually do better under standard VAT accounting, where they can reclaim VAT on those purchases directly.
The one number that actually decides it
Compare your flat rate percentage against how much input VAT you'd realistically reclaim under standard accounting. If your reclaimable purchase VAT is small relative to your turnover, the Flat Rate Scheme is usually the better (and simpler) choice; if it is large, standard accounting usually wins. This is worth checking with an accountant against your actual numbers rather than guessing from your sector alone - HMRC's own flat rate percentages are published on gov.uk and worth checking directly, since they are reviewed periodically.
What does not change on your invoices
Your invoices look identical either way - you still show your VAT number, the standard VAT rate, and the VAT amount and total, exactly as any VAT-registered business would. The Flat Rate Scheme changes what you pay HMRC, not what your customer sees on the invoice.
Do I charge customers less VAT on the Flat Rate Scheme?
No - you still charge the normal VAT rate (usually 20%) on your invoices. The Flat Rate Scheme only changes how much of that VAT you keep versus pay to HMRC, not what you charge customers.
Can I reclaim VAT on purchases under the Flat Rate Scheme?
Who benefits most from the Flat Rate Scheme?