Can a sole trader use the VAT flat rate scheme?

Can a sole trader use the VAT flat rate scheme?

If you’re a sole trader and VAT is on your radar (or already part of your day-to-day admin), you may have heard about the VAT Flat Rate Scheme and wondered whether it’s open to you. The short answer is yes: a sole trader can use the VAT Flat Rate Scheme, provided they meet the eligibility rules and follow the scheme’s requirements. But the more useful answer is: it depends on your numbers, your industry sector, and the way your business spends money.

The Flat Rate Scheme (often shortened to “FRS”) is designed to simplify VAT accounting. Instead of tracking VAT on every purchase and reclaiming it in the usual way, you charge VAT to customers at the normal VAT rate, but you pay HMRC a fixed percentage of your VAT-inclusive turnover. The percentage depends on your business sector, and in many cases it can reduce the time you spend on VAT bookkeeping. However, because the scheme changed a few years ago (including rules for “limited cost traders”), it’s not automatically beneficial for every small business.

This article breaks down what the VAT Flat Rate Scheme is, how it works for sole traders, who can join, who should avoid it, and how to decide whether it’s a good fit for your business. It also highlights common pitfalls, practical examples, and what to do if your circumstances change.

What the VAT Flat Rate Scheme is in plain English

Under standard VAT accounting, you do two main things each VAT period: you add up the VAT you’ve charged customers (output VAT) and subtract the VAT you’ve paid on business purchases (input VAT). The difference is what you pay to HMRC (or claim back if input VAT is higher, which is less common for many service businesses).

The VAT Flat Rate Scheme simplifies this by changing how you calculate the VAT you pay to HMRC. You still charge customers VAT at the normal rate (for example, 20% for standard-rated supplies). But instead of paying HMRC the difference between output VAT and input VAT, you pay a fixed percentage of your total VAT-inclusive sales. That fixed percentage is called your “flat rate percentage,” and it depends on your business category.

So, in a basic example: you invoice a customer £1,200 including VAT (which would typically be £1,000 net plus £200 VAT). Under the Flat Rate Scheme, you don’t pay HMRC £200 minus whatever VAT you spent on purchases. Instead, you pay HMRC your flat rate percentage of the £1,200. If your percentage is 12%, you pay £144 to HMRC. The remaining £56 is effectively kept by your business (though it’s not “profit” in a tax sense until you account for all costs and income). On the flip side, if you have significant VATable costs, you might do worse under the scheme because you can’t usually reclaim input VAT in the normal way.

Can a sole trader join the Flat Rate Scheme?

Yes. The Flat Rate Scheme is not restricted to limited companies. Sole traders, partnerships, and limited companies can all use it if they’re VAT-registered and meet the conditions for entry and ongoing eligibility.

In practice, many sole traders consider the scheme because they’re in service-based work (consulting, design, marketing, IT support, coaching, trades, and more). Service businesses often have relatively low VATable costs compared with their sales, and that’s where the Flat Rate Scheme can sometimes offer a financial advantage as well as administrative simplicity.

However, whether a sole trader should join is a separate question. The scheme can be beneficial in some scenarios and unhelpful in others. The key is understanding the rules and comparing outcomes under both methods.

Core eligibility rules for the Flat Rate Scheme

To use the Flat Rate Scheme, you must be VAT-registered (or registering for VAT) and meet the scheme’s turnover rules. The scheme is intended for smaller businesses. Your eligibility is based on your VAT-exclusive turnover (your sales before VAT), and HMRC sets limits for joining and staying in the scheme.

Generally, you can join if you expect your VAT-taxable turnover (excluding VAT) to be within the entry threshold. There is also an upper limit for staying in the scheme; if your turnover increases beyond that, you’ll normally need to leave the scheme and revert to standard VAT accounting. The scheme also considers “total business income” in some cases, which can include exempt or non-VATable income, depending on your circumstances.

There are also practical eligibility considerations. For example, you generally can’t use the Flat Rate Scheme if you’re involved in certain VAT avoidance arrangements or if your business falls under specific restrictions. In everyday terms, most straightforward sole traders who are VAT-registered and under the turnover limits can apply.

One important point: you don’t have to be newly VAT-registered. A sole trader who has been VAT-registered for years can switch onto the Flat Rate Scheme if they meet the criteria and it makes sense for them.

How the scheme works for a sole trader day to day

Once you’re on the Flat Rate Scheme, your invoicing to customers looks broadly the same as under standard VAT accounting. If you sell standard-rated services, you still charge VAT at 20% on your invoices. Customers who are VAT-registered can reclaim that VAT in the usual way. From the customer’s perspective, nothing about the invoice has to “announce” that you’re on the scheme (though your VAT number must be included, and your invoices must be valid VAT invoices when required).

The change happens in your VAT return calculations. Rather than adding up input VAT and output VAT in the usual way, you calculate your flat rate VAT due by multiplying your flat rate percentage by your VAT-inclusive turnover for the period. You still submit VAT returns, and you still keep records, but the recordkeeping can be simpler because you’re not reclaiming input VAT on most purchases.

That said, “simpler” doesn’t mean “no admin.” You still need to track your sales, ensure you apply the correct flat rate percentage, and keep evidence of your VAT-inclusive turnover. You also need to handle special cases properly (for example, capital assets under certain conditions, reverse charge scenarios, and differences in treatment for some transactions).

Understanding flat rate percentages and business categories

The flat rate percentage you use depends on the type of business you run. HMRC publishes a list of business categories and the associated flat rate percentages. Examples include advertising, IT consultancy, management consultancy, accountancy, engineering, and more. Some categories are broad, and it’s not always obvious which one fits best. Choosing the right category matters because the percentage directly affects how much VAT you pay to HMRC.

For a sole trader with a clear, single-line service, picking the category can be straightforward. For instance, if you’re an IT contractor mainly providing software development services, you might fall into a category that covers computer and IT consultancy or similar. If you’re a graphic designer, you might look at categories related to advertising or creative services depending on the precise nature of your work. If you’re a tradesperson, there are categories for building and construction services, but again it can depend on what you do most of the time.

Where it gets tricky is when your business does multiple things. You may need to choose the category that best matches your main business activity. If the balance of your work shifts, you might also need to reconsider your category. Because the difference between percentages can be meaningful, it’s worth getting it right rather than guessing.

The limited cost trader rule and why it matters

One of the biggest reasons the Flat Rate Scheme isn’t automatically a win anymore is the “limited cost trader” rule. In simple terms, if your business spends relatively little on goods (as HMRC defines them), you may be required to use a higher flat rate percentage. This higher percentage is designed to stop businesses that mainly supply labour/services, with very few goods costs, from gaining a VAT advantage that HMRC considers inappropriate.

The limited cost trader rules are particularly relevant to sole traders in service industries: consultants, coaches, many freelancers, and lots of professional services. If you mainly sell your time and expertise and your purchases are mostly things like software subscriptions, travel, phone bills, and other services rather than “goods,” you may fall into the limited cost trader definition.

Why is that a big deal? Because the limited cost trader flat rate percentage is higher than many standard sector percentages. In many cases, that higher percentage makes the scheme less financially attractive, and sometimes it can make it more expensive than standard VAT accounting.

So, for a sole trader, the real question is not just “Can I use the Flat Rate Scheme?” but “Will I be treated as a limited cost trader, and if so, is the scheme still beneficial?”

What counts as “goods” for the limited cost trader test?

It’s important to understand what “goods” means in this context because it doesn’t match everyday usage perfectly. “Goods” generally refers to physical items you use in your business (or buy for resale), rather than services. For example, raw materials, stock, equipment consumables, and certain physical supplies might count as goods. But many costs that service businesses commonly have—like software subscriptions, advertising services, accountancy fees, professional indemnity insurance, web hosting, and most outsourced services—do not count as goods for this test.

Also, some purchases that feel like “goods” might not qualify depending on how they’re used and whether they are considered capital expenditure, or whether they are excluded categories. Additionally, costs like food and drink for you, entertainment, and some vehicle-related expenses may be excluded. The point is that you can’t assume your business spends “enough on stuff” just because you have regular expenses.

For many sole traders, especially those operating from a laptop and a phone, the level of qualifying “goods” spend is low. That can push you into the limited cost trader category even if your overall business costs are not low.

How to tell if you’re likely to benefit financially

To decide whether the scheme is financially beneficial, you need to compare:

1) How much VAT you would pay under standard VAT accounting (output VAT minus input VAT), versus

2) How much VAT you would pay under the Flat Rate Scheme (flat rate percentage multiplied by VAT-inclusive turnover).

A practical approach is to run the numbers for the last 12 months (or a realistic forecast if you’re new). If your input VAT on purchases is small, the Flat Rate Scheme may reduce the VAT you pay and leave you with a small margin. If your input VAT is significant, standard VAT accounting may be better.

But don’t forget the limited cost trader rule. If you’re a limited cost trader, the flat rate percentage may be high enough that the scheme becomes less appealing.

It’s also worth considering pricing and customer type. If most of your customers are VAT-registered businesses, charging VAT is usually neutral for them because they can reclaim it. If many of your customers are not VAT-registered (for example, members of the public), VAT registration can affect how competitive your pricing looks. The Flat Rate Scheme doesn’t change the VAT rate you charge customers, but it can affect how you think about gross and net pricing in your business.

Administrative simplicity: what it helps with and what it doesn’t

One reason sole traders like the Flat Rate Scheme is that it can simplify bookkeeping. You don’t have to track and reclaim VAT on every small expense (except for some specific cases), and that can reduce the time spent categorising receipts and checking VAT amounts. You still need decent records, but the VAT return can be more straightforward.

That said, modern accounting software has made standard VAT accounting much easier than it used to be. Many platforms automatically calculate VAT on sales and purchases, generate VAT returns, and reduce the manual work. So the “admin advantage” of the Flat Rate Scheme may be smaller than it once was, especially if you already use software and you keep good digital records.

Also, the Flat Rate Scheme does not remove the need to understand VAT basics. You still need to know whether your sales are standard-rated, zero-rated, reduced-rated, or exempt. You still need to apply the correct VAT treatment on invoices. If you deal with cross-border services, reverse charge rules, or unusual transactions, you still need to handle those correctly. Flat rate VAT is a method of calculation, not an exemption from VAT rules.

What you can and can’t reclaim while on the Flat Rate Scheme

A common misunderstanding is that you cannot reclaim any VAT at all under the Flat Rate Scheme. The reality is: you normally do not reclaim VAT on day-to-day purchases, but there are limited situations where you can reclaim VAT, most notably on certain capital assets (for example, a single purchase of capital goods above a certain value, subject to conditions).

This can matter for sole traders who plan to buy expensive equipment. For instance, if you’re a photographer planning to buy a high-end camera kit, or a tradesperson buying a large piece of equipment, you may be able to reclaim VAT on that capital purchase even while using the scheme, depending on the precise rules and whether the purchase qualifies as capital goods.

Because the rules are specific, it’s wise to treat capital purchases as a “decision point.” If you’re about to spend a large amount on equipment, you might compare the options: standard VAT accounting could allow broader VAT recovery on purchases, while the Flat Rate Scheme could still be beneficial depending on your sector percentage and overall costs.

First year discount and why timing matters

When you are newly VAT-registered and join the Flat Rate Scheme, there is typically a discount on your flat rate percentage for the first year you are in the scheme. This can make the scheme more attractive for new VAT registrations, including sole traders who have just crossed the VAT threshold or who registered voluntarily.

The discount applies for a limited period, and the timing is based on when you become VAT-registered and when you join the scheme. For a sole trader planning a new venture or anticipating an increase in turnover, the first-year discount can be part of the decision. But it shouldn’t be the only reason to join; you need the scheme to make sense after the discount ends as well, otherwise you may end up switching methods later.

Examples for sole traders: when the scheme can work well

Here are some scenarios where a sole trader might find the Flat Rate Scheme helpful:

Example 1: A sole trader with low input VAT and a favourable flat rate percentage. Imagine a sole trader providing a specialist service with minimal costs that include VAT. They work from home, use a basic laptop, and their main expenses are things like broadband and a few subscriptions. If their flat rate percentage is relatively low (and they are not a limited cost trader), the scheme could reduce the VAT they pay compared with standard VAT accounting, leaving them with a modest gain.

Example 2: A sole trader who values simplicity and has stable, predictable turnover. Some people prefer fewer moving parts. If you have steady sales, straightforward invoicing, and you want your VAT calculation to be predictable, the Flat Rate Scheme can make it easier to forecast VAT payments. That can help with cash flow planning, especially if you set aside VAT each time you get paid.

Example 3: A sole trader whose customers are mostly VAT-registered. If your customers are VAT-registered, your VAT charge is usually a pass-through. In that scenario, you can focus on which VAT accounting method results in lower VAT paid to HMRC without worrying too much about customer price sensitivity, because your customers can reclaim the VAT.

Examples for sole traders: when the scheme may not be a good idea

And here are scenarios where a sole trader might want to avoid the Flat Rate Scheme:

Example 1: You have significant VATable costs. If you regularly buy goods or services with VAT—especially if you’re in a business with materials, stock, or large subcontractor costs—standard VAT accounting may allow you to reclaim a meaningful amount of input VAT. Under the Flat Rate Scheme, you usually can’t reclaim that VAT, so your overall VAT cost can increase.

Example 2: You’re likely to be a limited cost trader. If you spend very little on qualifying goods, you may have to use the higher limited cost trader percentage. For many sole traders in professional services, this is the factor that makes the scheme unattractive. You might find that standard VAT accounting results in a lower VAT payment overall.

Example 3: You have mixed or complicated VAT issues. If your business involves partial exemption, complex cross-border transactions, or a mix of VAT treatments, you might already need careful VAT bookkeeping. In that case, the “simplicity” of the Flat Rate Scheme may not reduce admin as much as you expect, and it could complicate matters when you need detailed VAT analysis.

Cash flow considerations for sole traders

VAT can be a cash flow trap for any small business. You collect VAT from customers, but that VAT is not your money. The Flat Rate Scheme can change the size and timing of the VAT you pay, but it doesn’t eliminate the need for disciplined cash management.

One potential benefit is predictability: you can calculate your expected VAT payment as a fixed percentage of your gross sales. This can make it easier to set aside the right amount. Some sole traders do this by moving a percentage of each invoice payment into a separate bank account reserved for tax and VAT. If you do this consistently, VAT returns become less stressful.

On the other hand, if you’re used to reclaiming input VAT under standard VAT accounting, switching to flat rate can increase your VAT cost and reduce your available cash unless you adjust prices or plan carefully. The impact can be subtle: it may feel like you’re doing the same work and charging the same invoices, but you end up paying more to HMRC because you no longer reclaim VAT on expenses.

Impact on pricing and competitiveness

For many sole traders, the biggest strategic VAT question is whether being VAT-registered affects the price the customer sees. The Flat Rate Scheme itself doesn’t change the VAT rate you charge; you still charge VAT at the normal rate for your supplies. But the method you use can influence how you think about pricing.

If your customers are not VAT-registered—such as private individuals—charging VAT can make you look more expensive than a competitor who is not VAT-registered. Some sole traders respond by keeping their gross price similar to what customers expect, effectively absorbing some of the VAT cost. Others keep their net price the same and accept that the gross price is higher. The right approach depends on your market, how price-sensitive your customers are, and whether you can justify a premium based on quality or reputation.

If your customers are VAT-registered businesses, the VAT is less likely to affect your competitiveness, because they can reclaim it. In that case, the Flat Rate Scheme is more about your internal efficiency and your net VAT cost.

Record keeping and invoicing requirements

As a sole trader on the Flat Rate Scheme, you still need to keep proper VAT records. You need evidence of your sales, including VAT invoices where appropriate, and you should keep records of your purchases as well (even if you’re not reclaiming VAT on most of them). Good record keeping is not only about VAT compliance; it also supports accurate income tax calculations and helps you understand profitability.

Invoicing remains important. Your invoices must show the VAT amount and rate when you are required to issue a VAT invoice. If you issue simplified invoices for smaller amounts, you still need to meet the relevant requirements. If you use accounting software, make sure it’s configured correctly for the Flat Rate Scheme. Many platforms have a setting for flat rate VAT that automatically calculates VAT returns differently.

Also, keep an eye on your business category and flat rate percentage. If your work changes over time, you may need to update your category to ensure you’re using the right percentage. This is particularly relevant for sole traders who start with one type of work and gradually expand into other services.

Joining the scheme: how it typically works

To join the Flat Rate Scheme, you apply to HMRC. You can apply when you register for VAT or after you’re already registered. Once accepted, you start using the scheme from the agreed date. From that point on, you calculate VAT due using your flat rate percentage on your VAT-inclusive turnover.

It’s a good idea to plan your start date. If you have a quarter with unusual expenses that include high VAT (for example, buying equipment, paying for a large advertising campaign, or incurring big set-up costs), you might prefer to stay on standard VAT accounting for that period so you can reclaim input VAT. Alternatively, if you are starting with a low-cost service model and your first year discount applies, you might prefer to join sooner.

For a sole trader, the best “join date” is often the one that aligns with cash flow and predictable sales, rather than jumping in mid-period without thinking. If you’re unsure, running a few scenarios using your real numbers can quickly show whether timing makes a noticeable difference.

Leaving the scheme and what triggers an exit

Sole traders can leave the Flat Rate Scheme voluntarily, and in some cases they must leave if they no longer meet the eligibility conditions. Common reasons include turnover growth above the limit, business changes that affect eligibility, or simply finding that the scheme no longer produces a benefit.

Leaving the scheme means returning to standard VAT accounting. That usually involves going back to tracking input VAT and output VAT in the normal way. Depending on your circumstances, you may need to consider VAT on stock and assets at the point of leaving, and you’ll want to ensure your accounting software settings and processes are updated accordingly.

Because switching methods affects how you account for VAT, it’s worth keeping clear records around the time you leave. A clean transition helps avoid mistakes on VAT returns and reduces the chance of confusion when you review your business performance year to year.

Common mistakes sole traders make with the Flat Rate Scheme

Even though the scheme is meant to be simpler, there are a few common traps:

Choosing the wrong business category. If you select a category with a lower percentage that doesn’t match what you actually do, you can end up underpaying VAT, which may lead to corrections, interest, or penalties. The category should reflect your main business activity.

Ignoring the limited cost trader rules. Some sole traders join expecting a financial gain, only to discover they must use the higher limited cost trader percentage. This can wipe out the benefit and may leave them paying more VAT than under standard accounting.

Misunderstanding what counts as turnover. Flat rate VAT is calculated on VAT-inclusive turnover. If you mistakenly use net turnover, your VAT payment will be wrong. You also need to be clear on what sales are included and how to treat things like credit notes, refunds, or other adjustments.

Thinking VAT is “sorted” and relaxing on VAT compliance. Flat rate doesn’t change the underlying VAT rules on what you charge VAT on, what rate applies, and when VAT is due. It’s still important to issue correct invoices and apply VAT correctly.

Not reviewing the scheme annually. A sole trader’s business can change quickly. Costs can rise, sales can change, and a method that was beneficial last year might not be beneficial this year. A simple annual review can prevent you staying on an unsuitable method for too long.

How to decide: a practical checklist for sole traders

If you’re a sole trader thinking about the Flat Rate Scheme, the following checklist can help you make a grounded decision:

1) Confirm you meet the turnover limits. If you are above the thresholds (or about to be), the scheme may not be available or may be short-lived.

2) Identify the correct business category and percentage. Choose the category that best matches what you mainly do. If your work is mixed, consider which activity produces most of your turnover.

3) Check whether you are a limited cost trader. Estimate your qualifying goods spend and compare it with the scheme’s criteria. If you are a limited cost trader, use the higher percentage in your calculations.

4) Compare the last 12 months under both methods. If you have data, calculate VAT due under standard VAT accounting and under the Flat Rate Scheme. If you don’t have full data, do a realistic forecast for sales and expenses.

5) Consider upcoming purchases. If you plan to buy expensive equipment or have a big VATable project cost, factor that into your timing and method choice.

6) Consider your customers. If most customers are VAT-registered, pricing impact is usually smaller. If customers are not VAT-registered, VAT registration affects visible prices regardless of scheme, and you may need to consider how you position your pricing.

7) Evaluate admin and software. If you already use accounting software that handles VAT well, the admin benefit of flat rate may be limited. If you do bookkeeping manually, the simplification might be more valuable.

8) Plan to review. Put a reminder in your calendar to review the scheme each year or when your business model changes.

Is the Flat Rate Scheme “right” for freelancers and contractors?

Many sole traders are freelancers or contractors, and this group often asks about the Flat Rate Scheme because it used to be a popular way to reduce VAT paid to HMRC. Whether it’s still worthwhile depends heavily on the limited cost trader rule and the nature of your expenses.

If you are a freelancer with very low qualifying goods costs and most of your expenses are services (software, coworking, phone, marketing, professional fees), you may be classed as a limited cost trader. In that case, the flat rate percentage may be high enough that the scheme offers little or no financial advantage compared with standard VAT accounting.

However, not every freelancer is in that position. Some have meaningful goods spend—especially in creative industries (equipment, materials), certain trades, and retail-like models. Others have a business category percentage that makes the scheme competitive even without large input VAT recovery. The only reliable way to know is to run the numbers using your own turnover and costs.

What about sole traders who sell both goods and services?

If you are a sole trader who sells a combination of goods and services—say you provide installation services and also sell products as part of the job—your position can be different. You may have higher “goods” spend, which can help you avoid the limited cost trader percentage. But you may also have more input VAT to reclaim under standard VAT accounting, which could make standard VAT more attractive.

In mixed businesses, the Flat Rate Scheme can still be useful, but the comparison becomes more nuanced. You may need to look at gross margins, stock purchases, and how regularly you incur VATable costs. If your business has fluctuating costs or seasonal stock buying, standard VAT accounting might align better with reality. If your costs are stable and your flat rate percentage is favourable, flat rate may still simplify things and keep VAT predictable.

Making a confident decision as a sole trader

So, can a sole trader use the VAT Flat Rate Scheme? Yes—if you are VAT-registered, meet the turnover rules, and apply successfully. But deciding whether you should use it is a practical business decision rather than a purely administrative one.

For many sole traders, the most important factors are the limited cost trader rule, the correct sector percentage, and the level of input VAT you would otherwise reclaim. The scheme can be a genuine simplification, and in some cases it can reduce the VAT you pay to HMRC. In other cases, it can increase your VAT cost and offer little benefit beyond a slightly simpler calculation.

The good news is that this decision is measurable. You don’t have to guess. With your turnover, your expense profile, and the correct flat rate percentage, you can compare outcomes and choose the method that best fits your business. If you prefer simplicity and predictability, you might lean towards the Flat Rate Scheme when the numbers are close. If the difference is significant, the decision is easier: choose the method that leaves your business in a stronger position while keeping you compliant.

As your business grows and changes, revisit the decision. A scheme that works well when you’re a small, lean operation may not work as well when you take on subcontractors, start buying more equipment, or expand your services. Regular reviews keep your VAT approach aligned with your business reality—and that’s exactly what good tax admin should do: support the business, not distract from it.