What is the difference between Flat Rate and Standard VAT?

Learn the key differences between the Flat Rate and Standard VAT schemes in the UK. Understand how each one works, who they suit best, and how they affect your VAT payments and record keeping.

When you register for VAT, one of the first decisions you’ll make is how to account for it. HMRC offers several VAT accounting schemes to suit different types of businesses, and two of the most common are the Standard VAT Scheme and the Flat Rate Scheme.

Both allow you to collect and pay VAT, but they work in very different ways. Understanding the difference between them can help you choose the one that saves your business time, money, and effort.

This article explains how each scheme works, how to calculate VAT under both, and which might be best for your business.

What is the Standard VAT Scheme?

The Standard VAT Scheme is the default method for calculating VAT. Under this system, you charge VAT on your sales (known as output VAT) and reclaim VAT on your purchases (input VAT).

You must record VAT on every transaction and report it to HMRC, usually every quarter, through your VAT return. The return shows the difference between the VAT you’ve charged customers and the VAT you’ve paid to suppliers.

If you have charged more VAT than you’ve paid, you pay the difference to HMRC. If you’ve paid more VAT than you’ve charged, HMRC refunds you.

Example:
You charge customers £10,000 plus £2,000 VAT (£12,000 total). You’ve paid £800 VAT on your business purchases. You pay HMRC the difference of £1,200 (£2,000 minus £800).

Advantages of the Standard VAT Scheme:

  • You can reclaim VAT on most business purchases and expenses.

  • It is suitable for businesses with significant costs or high input VAT.

  • It provides accurate VAT reporting.

Disadvantages:

  • Requires detailed record keeping.

  • VAT must usually be paid before your customers have paid you (unless you use the Cash Accounting Scheme).

  • Can be time consuming for small businesses.

What is the Flat Rate VAT Scheme?

The Flat Rate Scheme is designed to simplify VAT reporting for small businesses. Instead of working out VAT on every transaction, you pay a fixed percentage of your total turnover (including VAT) to HMRC.

The percentage you pay depends on your industry type and reflects the average VAT that businesses in your sector pay to suppliers.

You still charge VAT to your customers at the normal rate (usually 20%), but you keep the difference between what you charge and what you pay to HMRC. This difference represents your allowance for VAT on expenses.

Eligibility:

  • Your VAT taxable turnover (excluding VAT) must be £150,000 or less when you join.

  • You must leave the scheme if your total turnover exceeds £230,000.

Example:
Your annual turnover including VAT is £60,000, and your flat rate percentage is 12%. You pay HMRC £7,200 (12% of £60,000). You keep the remaining VAT collected as your allowance for input tax.

Advantages of the Flat Rate Scheme:

  • Simpler record keeping and VAT calculations.

  • Predictable VAT payments each quarter.

  • You may keep a small profit if your business has low VATable expenses.

  • You receive a 1% discount on the flat rate percentage during your first year of VAT registration.

Disadvantages:

  • You cannot reclaim VAT on purchases (except for certain capital assets costing £2,000 or more).

  • If your expenses are high, you may end up paying more VAT overall.

  • Not suitable for businesses that regularly buy goods or materials with VAT.

Key differences between Flat Rate and Standard VAT

The main differences between the two schemes lie in how VAT is calculated, the ability to reclaim VAT, and the level of record keeping required.

Feature Standard VAT Scheme Flat Rate Scheme

Eligibility Available to all VAT-registered Only for businesses with taxable turnover

businesses under £150,000

VAT Calculation Based on the difference between VAT on Based on a fixed percentage of total

sales and VAT on purchases turnover including VAT

Input VAT Reclaim Can reclaim VAT on all eligible business Cannot reclaim VAT on most purchases

purchases

Admin Effort More detailed accounting required Simpler, less record keeping

Best For Businesses with high expenses or VAT on Small service-based businesses with low

costs expenses

How to decide which scheme is right for you

Choosing between the Flat Rate and Standard VAT schemes depends on your business size, expense level, and administrative capacity.

1. Consider your expenses
If you spend heavily on goods, materials, or VATable services, the Standard VAT Scheme will likely save you money because you can reclaim all input VAT.

If your expenses are minimal and your main costs are staff and subcontractors, the Flat Rate Scheme may simplify your VAT without costing you extra.

2. Assess your turnover and growth
The Flat Rate Scheme is only available to smaller businesses. If you expect your turnover to grow above £150,000 soon, it may be easier to start with the Standard Scheme rather than switch later.

3. Think about administration
The Flat Rate Scheme can save time because it removes the need to record VAT on every transaction. This makes it ideal for freelancers and small service providers who prefer simplicity over precision.

4. Run the numbers
Before deciding, calculate how much VAT you would pay under both schemes. Accounting software or a VAT specialist can help compare outcomes and identify which is more beneficial.

Changing between schemes

You can apply to switch from one scheme to another if your business circumstances change. HMRC allows transitions as long as you meet the eligibility requirements. For example, if your expenses increase significantly, you might move from the Flat Rate to the Standard Scheme to reclaim VAT on costs.

Similarly, if your turnover drops below the Flat Rate limit, you can ask HMRC to join the scheme for simplicity. Always notify HMRC when making such changes and keep clear records of your calculations.

Professional guidance

VAT can be one of the most complex areas of business accounting. Choosing the right scheme can affect cash flow, profit margins, and compliance. A professional accountant can:

  • Compare both VAT schemes based on your actual figures.

  • Help set up your accounting software correctly.

  • Handle VAT returns and ensure accuracy.

  • Advise on when to change schemes as your business grows.

The bottom line

The key difference between the Flat Rate and Standard VAT schemes lies in how VAT is calculated and reclaimed. The Standard Scheme offers flexibility and full VAT recovery but requires more detailed record keeping. The Flat Rate Scheme is simpler and time saving, but you lose the ability to reclaim most VAT on purchases.

If your business has low expenses and you prefer straightforward accounting, the Flat Rate Scheme could be ideal. If you incur significant VAT on costs or expect rapid growth, the Standard VAT Scheme is usually the better choice.

Taking time to assess your turnover, expenses, and administrative capacity ensures you choose the scheme that best fits your business and keeps your VAT efficient and compliant.