If you are VAT-registered in the UK, you have a choice: the standard scheme, where you charge 20% and reclaim VAT on costs, or the Flat Rate VAT Scheme, where you pay HMRC a single fixed percentage of your turnover. For some freelancers it saves real money and hours of admin. For others, especially low-cost consultants, it quietly costs more. This guide runs the numbers for 2026/27 so you can choose with confidence.
Rates last reviewed: October 2026
How does the Flat Rate VAT Scheme work?
The Flat Rate VAT Scheme lets you pay a fixed percentage of your VAT-inclusive turnover to HMRC instead of doing the usual output VAT minus input VAT calculation. You still charge your clients the full 20% VAT, but you hand over a smaller slice and keep the difference. In exchange, you give up the right to reclaim VAT on your day-to-day costs, so the scheme only pays off if your fixed percentage is lower than what your VAT bill would be under the standard scheme.
Under standard VAT accounting, you charge 20% VAT on your invoices, reclaim the VAT you paid on business costs, and pay HMRC the difference each quarter. Under the Flat Rate Scheme, that two-sided sum is replaced by one simple calculation: gross (VAT-inclusive) turnover multiplied by your sector’s flat rate percentage. You cannot reclaim VAT on most purchases, with one exception. You can still reclaim VAT on single capital goods items that cost more than £2,000 on one invoice, VAT included, such as a laptop or camera bought for the business.
What flat rate would you pay as a freelancer?
HMRC publishes a list of flat rate percentages by sector. The one that applies depends on your main business activity. Common freelancer rates include:
| Sector | Flat rate | Flat rate in year one |
|---|---|---|
| IT consultancy | 14.5% | 13.5% |
| Accountancy or bookkeeping | 14.5% | 13.5% |
| Management consultancy | 14% | 13% |
| Hairdressing | 13% | 12% |
| Catering | 12.5% | 11.5% |
| Advertising | 11% | 10% |
| Photography | 11% | 10% |
| Retail (non-food) | 7.5% | 6.5% |
In your first year as a VAT-registered business on the Flat Rate Scheme, HMRC gives you a 1% discount on your sector rate. A 14.5% rate becomes 13.5% for the first twelve months. It is modest, but worth having if the scheme suits you in year one. You can model the exact figures on LancerBill’s VAT calculator before you commit.
Tip: The percentage is charged on your gross, VAT-inclusive turnover, not your net fees. A 14.5% flat rate is really 17.4% of your net fees (14.5 × 1.20). Every flat rate is 20% bigger than it looks, so always multiply by 1.20 when you sanity-check the deal.
What is the limited cost trader trap?
A limited cost trader is a business that spends very little on goods, and HMRC forces it to use a flat rate of 16.5% instead of its sector rate. You count as one if your spending on relevant goods is less than 2% of your VAT-inclusive turnover, or under £1,000 a year (£250 a quarter), even if the 2% test is passed. At 16.5% of gross, which equals 19.8% of net, the scheme keeps almost nothing of the 20% you charged, and it is usually more expensive than standard VAT.
Relevant goods means physical goods you buy and use in the business. What does not count is a long list, and it catches out most service freelancers:
- All services, including software subscriptions, accountancy, telecoms, rent, insurance, advertising, training and subcontractors
- Capital expenditure of any value
- Food and drink for you or your staff
- Vehicle costs including fuel, unless you run a transport business
- Goods bought for resale, leasing or hire, unless that is your main activity
- Promotional items and gifts
Strip those out of a typical one-person consultancy and what is left is stationery, a few cables and the odd bit of hardware. That is why most freelance consultants land on 16.5%, and why at that rate the scheme is worth roughly nothing: you charge 20%, pay over 19.8% of the same net figure, and you have given up input VAT recovery to do it.
Watch out: The limited cost test is checked every VAT quarter, not once. A freelance designer who buys £1,300 of print stock one quarter and nothing the next can flip in and out of the 16.5% rate. Keep a running tally of goods spend per quarter, or the rate can change underneath you.
Flat Rate Scheme vs standard VAT: a worked example
Take a freelance management consultant billing £60,000 net a year. Assume her sector flat rate is 14%, and she has £3,000 of VAT-bearing costs (software, phone, professional fees), so £600 of input VAT reclaimable. Here is the comparison:
| Standard VAT | Flat Rate Scheme (14%) | Flat Rate Scheme (16.5% limited cost) | |
|---|---|---|---|
| Net fees | £60,000 | £60,000 | £60,000 |
| Output VAT charged at 20% | £12,000 | £12,000 | £12,000 |
| Gross turnover (VAT inclusive) | £72,000 | £72,000 | £72,000 |
| Input VAT reclaimed | £600 | £0 | £0 |
| Flat rate payment | — | 14% × £72,000 = £10,080 | 16.5% × £72,000 = £11,880 |
| VAT bill for the year | £12,000 − £600 = £11,400 | £10,080 | £11,880 |
| Difference vs standard | — | £1,320 better off | £480 worse off |
With the 14% sector rate she gains £1,320 a year on the Flat Rate Scheme, plus the admin saving of not logging input VAT on every expense. In her first year the 1% discount drops her rate to 13%, so she would pay £9,360 and gain £2,040. But if her goods spend is £800 for the year, she fails the limited cost test (under £1,000) and must use 16.5%. Then the scheme costs her £480 more than standard VAT, and she has lost the £600 of input VAT she could have reclaimed.
Rule of thumb: if your sector rate is well below 16.5% and you genuinely buy enough goods to clear the limited cost test, the Flat Rate Scheme can pay. If you are heading for 16.5%, standard VAT almost always wins.
To run your own version of these sums, add and remove 20% VAT from any figure in seconds with LancerBill’s VAT calculator, and check how the VAT bill lands on your margins with the profit margin calculator.
Who is eligible for the Flat Rate Scheme?
You can join the Flat Rate Scheme if your taxable turnover, excluding VAT, will be £150,000 or less in the next twelve months. The join test is measured excluding VAT, while the leave tests are measured including VAT, which trips people up. These are the official thresholds published by HMRC on the GOV.UK VAT thresholds page:
- Join: turnover excluding VAT of £150,000 or less for the next 12 months
- Must leave: on the anniversary of joining, if your VAT-inclusive turnover for the previous 12 months was more than £230,000
- Must leave: if you expect your VAT-inclusive turnover in the next 30 days alone to exceed £230,000
HMRC can let you stay if it agrees your VAT-inclusive turnover for the next 12 months will be £191,500 or less. The scheme is voluntary and you can leave at any time by notifying HMRC, though you then return to standard VAT accounting and must start tracking input VAT again.
Remember that joining the scheme presupposes you are VAT-registered in the first place. The standard VAT registration threshold is £90,000 of taxable turnover in any rolling 12-month period for 2026/27, and you can deregister if turnover falls below £88,000. Our guide on whether freelancers need to charge VAT walks through registration in full.
Tip: If you are on the standard scheme with £60,000 of turnover, voluntary VAT registration can still pay when most clients are VAT-registered businesses and you have chunky reclaimable costs. It rarely pays when you sell mainly to consumers, because the 20% you add cannot be reclaimed by them.
How do you join, switch or leave a scheme?
You join the Flat Rate Scheme by applying to HMRC, usually through your Government Gateway account or through your accountant, and you can apply at the same time as you register for VAT. You can also switch from standard VAT to the Flat Rate Scheme at the start of a VAT quarter, and leave it to return to standard accounting whenever you choose by giving HMRC notice. Keep digital records either way, because Making Tax Digital applies to all VAT-registered businesses.
When you switch, watch the timing on your invoices. VAT is normally accounted for on invoices issued (accrual basis), so a big invoice raised just before you switch can change which scheme it lands in. If you use cash accounting, VAT counts when you are paid instead. Pick the scheme first, then check the crossover quarter carefully, ideally with your accountant.
If the Flat Rate Scheme does not suit you, two other simplified schemes exist: cash accounting (for turnovers up to £1.35 million) and annual accounting (also up to £1.35 million), both of which smooth cash flow in different ways. The core decision for most freelancers, though, is flat rate versus standard. Run the worked example above on your own fees and costs, and the answer usually shows itself.
One practical note for your invoicing: whichever scheme you choose, your invoices must show your VAT number, the VAT rate and the VAT amount. LancerBill’s free invoice generator handles VAT line items automatically, and if you are still setting your day rate to absorb a VAT bill, the freelance rate calculator bakes your target take-home pay into the number.
Key takeaways
- On the Flat Rate Scheme you charge clients 20% VAT but pay HMRC a fixed percentage of your gross turnover, and you cannot reclaim VAT on running costs.
- Freelancer sector rates range from 7.5% to 14.5%, with a 1% discount in your first year of VAT registration.
- The limited cost trader trap forces most low-cost consultants onto 16.5% of gross, where the scheme usually costs more than standard VAT.
- The flat rate applies to VAT-inclusive turnover, so every rate is 20% bigger than it looks (16.5% of gross equals 19.8% of net).
- Eligibility: £150,000 or less turnover excluding VAT to join; you must leave if VAT-inclusive turnover passes £230,000.
- Always run your own numbers both ways before opting in. If the scheme saves money, it also saves admin. If it does not, stay on standard VAT.
Frequently asked questions
Is the Flat Rate VAT Scheme worth it for a freelancer with no costs?
Almost never. With no goods spending you are a limited cost trader at 16.5% of gross turnover, which equals 19.8% of your net fees. On the standard scheme you would pay 20% of net minus any input VAT reclaimed, so the flat rate scheme leaves you worse off and costs you the input VAT you could have claimed.
Can I leave the Flat Rate Scheme if it is costing me money?
Yes. The scheme is voluntary and you can leave at any time by notifying HMRC. You then go back to standard VAT accounting from the agreed date, which means charging 20% as before and starting to track and reclaim input VAT on your costs again.
Does the Flat Rate Scheme apply to zero-rated or exempt sales?
You still pay your flat rate percentage on zero-rated sales, which makes the scheme a poor fit if a large share of your turnover is zero-rated. Exempt sales sit outside VAT entirely, so they do not count toward your flat-rate turnover in the same way.
What counts as goods for the limited cost trader test?
Only physical goods you buy and use in the business count, such as materials, stationery or stock. Services like software subscriptions, accountancy, telecoms and rent do not count, nor does capital expenditure, food and drink, vehicle costs, or goods for resale unless that is your main activity.
Do I still charge 20% VAT to clients on the Flat Rate Scheme?
Yes. You invoice exactly as normal, charging the standard 20% rate on your sales. The flat rate only changes what you hand over to HMRC afterwards: instead of 20% minus input VAT, you pay your sector percentage of the VAT-inclusive total and keep the difference.
What happens to the Flat Rate Scheme in my first year?
In the first twelve months after you register for VAT, HMRC reduces your sector flat rate by 1 percentage point. A 14.5% IT consultancy rate becomes 13.5%, and the 16.5% limited cost rate becomes 15.5%. The discount applies only in year one and cannot be repeated if you rejoin later.
This guide is for general information only and is not financial, tax or legal advice.