Flat Rate VAT Scheme vs Standard VAT: Which is Right for You?
If you’re a small business owner or freelancer in the UK, understanding VAT can sometimes feel like learning a new language. One of the most common questions we get at Welf Accountants is: “Should I use the Flat Rate VAT Scheme or the Standard VAT Scheme?”
Both have advantages, but the right choice depends on your business structure, turnover, and the type of expenses you incur. In this post, we’ll break down the differences to help you make an informed decision.
What Is the Standard VAT Scheme?
Under the Standard VAT Scheme, you charge VAT on your sales (output tax) and reclaim VAT on your purchases (input tax).
This means:
You collect VAT from your customers.
You deduct the VAT you’ve paid on eligible business expenses.
You pay the difference to HMRC (or claim a refund if you’ve paid more VAT than you collected).
Who It Suits Best
The Standard VAT Scheme works best for businesses that:
Have significant VATable expenses.
Regularly purchase stock, equipment, or services with VAT added.
Want full control and accuracy in VAT reporting.
Example
If you charge £10,000 + £2,000 VAT (£12,000 total) and spend £5,000 + £1,000 VAT on expenses, you’ll pay HMRC the difference:
£2,000 (VAT collected) - £1,000 (VAT on purchases) = £1,000 owed to HMRC.
What Is the Flat Rate VAT Scheme?
The Flat Rate VAT Scheme (FRS) was designed to simplify VAT for small businesses.
Instead of reclaiming VAT on each purchase, you pay HMRC a fixed percentage of your gross turnover, depending on your business type.
You still charge VAT to your customers (usually 20%), but you only pay HMRC a lower, flat rate — typically between 4% and 16.5% depending on your industry.
Who It Suits Best
The Flat Rate VAT Scheme is ideal for businesses that:
Have relatively low VATable expenses.
Prefer simpler bookkeeping.
Want to save time on VAT returns.
Example
A consultant charges £12,000 (including VAT) to a client. If the flat rate for their business type is 14.5%, they’ll pay:
£12,000 × 14.5% = £1,740 to HMRC.
That’s simpler than tracking every receipt — but remember, you can’t reclaim VAT on most purchases under this scheme.
Flat Rate VAT Scheme – The 1% Discount
During your first year of VAT registration, you can reduce your flat rate by 1%, making the scheme even more attractive for new businesses.
For example, if your industry’s rate is 14.5%, you’ll only pay 13.5% in your first year.
Potential Downsides of the Flat Rate Scheme
While the Flat Rate Scheme is simpler, it’s not always cheaper. You may pay more VAT overall if:
You regularly buy goods and services with VAT.
You fall under the “limited cost trader” category (where your flat rate becomes 16.5%).
Your clients are VAT-registered and you can’t pass on the benefit.
Key Differences
Standard VAT Scheme
VAT on Sales - Charged at standard rate
VAT on Purchases - Fully reclaimable
VAT paid to HMRC - Output VAT less Input VAT
Record Keeping - More detailed
Best for - Business with high expenses
Flat Rate VAT scheme
VAT on Sales - Charged at standard rate
VAT on Purchases - Not reclaimable (except for capital items over £2,000)
VAT paid to HMRC - Flat percentage of gross turnover
Record Keeping - Simpler
Best for - Business with low expenses and simple operations
Which VAT Scheme Is Right for You?
Choosing between the Flat Rate VAT Scheme and the Standard VAT Scheme depends on your:
Business type
Level of expenses
Turnover
Time available for bookkeeping
If simplicity is your priority and you have few VATable costs, the Flat Rate Scheme can save time and reduce admin.
But if your business has significant VATable expenses or you expect to reclaim a lot of input VAT, the Standard Scheme is usually more tax-efficient.
Get Expert VAT Advice from Welf Accountants
At Welf Accountants, we help businesses across the UK choose the most tax-efficient VAT scheme for their needs.
Whether you’re registering for VAT for the first time or reviewing your current setup, our expert team will guide you through every step — ensuring compliance and maximising your savings.
📞 Contact Welf Accountants today to discuss your VAT options and discover how we can help your business thrive.
👉 Visit www.welfaccountants.co.uk or email info@welfaccountants.co.uk