Flat rate VAT scheme for tradespeople: is it worth it?

If you are VAT-registered and your taxable turnover is under £150,000, the Flat Rate VAT Scheme might save you time and money. But it is not right for everyone. This guide breaks down exactly how it works for plumbers, electricians, builders, and other UK tradespeople.

How the flat rate scheme works

Under normal VAT accounting, you charge 20% VAT on your invoices and reclaim VAT on your business purchases. The difference is what you pay HMRC. With the flat rate scheme, you skip the reclaiming step entirely. Instead, you pay HMRC a fixed percentage of your total gross income (including VAT).

The percentage varies by trade. HMRC sets different rates for different industries. Here are the ones most relevant to tradespeople:

A worked example

Say you are a plumber who invoices £5,000 plus VAT in a quarter. Your gross income is £6,000 (including the £1,000 VAT you charged). Under the flat rate scheme at 9.5%, you pay HMRC £570 (9.5% of £6,000). You charged £1,000 in VAT, so you keep £430. That is money in your pocket.

Under standard VAT, if you spent £1,500 on materials (plus £300 VAT), you would owe HMRC £1,000 minus £300 = £700. So the flat rate scheme saves you £130 in this example.

But if your materials bill was £3,000 (plus £600 VAT), under standard VAT you would owe £1,000 minus £600 = £400. The flat rate scheme at £570 would cost you £170 more. The breakeven point depends on your material costs relative to turnover.

The limited cost trader rule

In April 2017, HMRC introduced the "limited cost trader" rule to stop businesses with very low costs from making large profits on the flat rate scheme. You are a limited cost trader if your VAT-inclusive spending on goods (not services) is either:

• Less than 2% of your VAT-inclusive turnover, or
• Less than £1,000 per year (if your turnover is above £50,000)

If you are classed as a limited cost trader, your flat rate jumps to 16.5%. At that rate, the scheme almost always costs you more than standard VAT accounting. Most tradespeople who buy significant amounts of materials will not fall into this category, but if your work is mainly labour with minimal materials (like some painting and decorating jobs), it is worth checking.

Who benefits most from the flat rate scheme?

The scheme works best for tradespeople who:

• Do mostly labour-heavy work with low material costs (think painting, decorating, general repairs)
• Want simpler bookkeeping and fewer receipts to track
• Have turnover under £150,000 (the scheme limit)
• Spend less than about 40% of their turnover on VAT-able materials

It works less well for builders, kitchen fitters, or bathroom installers who regularly spend thousands on materials, sanitaryware, and appliances. The more you spend on materials, the more input VAT you are giving up.

Real numbers for different trades

Use our free VAT calculator to run the numbers for your own situation.

How to join the flat rate scheme

You can apply online through your Government Gateway account or by calling HMRC on 0300 200 3700. You need to:

1. Already be VAT-registered (or apply at the same time as registering for VAT)
2. Have taxable turnover of £150,000 or less in the next 12 months
3. Not have left the scheme in the previous 12 months

HMRC will confirm your flat rate percentage based on your trade. You start using the scheme from the beginning of your next VAT period after approval.

Leaving the scheme

You must leave the flat rate scheme if your total business income (including non-taxable income) exceeds £230,000 in any 12-month period. You can also leave voluntarily at any time by writing to HMRC or calling them. You will need to go back to standard VAT accounting from the start of your next VAT period.

What you cannot reclaim on the flat rate scheme

This is the big trade-off. On the flat rate scheme, you cannot reclaim input VAT on most purchases. That means the VAT you pay on tools, fuel, materials, insurance, and other business costs stays as your expense.

There is one exception: you can reclaim VAT on capital expenditure items costing £2,000 or more (including VAT) in a single purchase. So if you buy a new van for £25,000 plus VAT, you can reclaim the £5,000 VAT on that purchase even while on the flat rate scheme. But you cannot reclaim VAT on a £150 drill or £800 worth of copper pipe.

Flat rate scheme and CIS

If you work as a subcontractor under the Construction Industry Scheme, the flat rate scheme and CIS can interact in ways that catch people out. Your CIS deductions are calculated on the net payment amount, not the VAT-inclusive amount. But your flat rate VAT is calculated on your gross turnover including VAT.

Check our CIS deduction calculator to make sure your figures line up before submitting your VAT return.

Frequently asked questions

Still not sure which VAT scheme is right for you? Create your first invoice with InvoiceAdept's free invoice generator and let the software handle the VAT calculations for you.