Flat Rate VAT Scheme for tradespeople: is it worth it?
Quick answer
The Flat Rate VAT Scheme lets businesses with VAT turnover of £150,000 or less pay HMRC a fixed percentage of their VAT-inclusive sales: 9.5% for general building and 14.5% for labour-only work. You cannot reclaim most VAT on costs. It suits builders with modest costs, but low-cost trades pay 16.5% and often lose money.
On this page
The Flat Rate Scheme can save a general builder a couple of thousand pounds a year, or cost a labour-only decorator money. It all depends on your costs and who your customers are. Here is how to tell which side you are on, using HMRC rules checked on 12 October 2026.
General information, not tax advice. This page explains HMRC's published rules. Run the numbers for your own business with HMRC's guidance or a qualified accountant before you join.
How does the Flat Rate Scheme work, in short?
Under normal VAT accounting, you pay HMRC the VAT you charge customers minus the VAT you pay on costs. Under the Flat Rate Scheme, you still charge customers 20% VAT, but you pay HMRC a fixed percentage of your VAT-inclusive turnover and keep the difference. In return, you cannot reclaim VAT on most purchases (except certain capital assets over £2,000).
| Business type | Flat rate | First year of VAT registration |
|---|---|---|
| General building or construction services | 9.5% | 8.5% |
| Labour-only building or construction services (materials under 10% of turnover) | 14.5% | 13.5% |
| Repairing personal or household goods | 10% | 9% |
| Any other activity not listed elsewhere | 12% | 11% |
| Limited cost business (any trade) | 16.5% | 15.5% |
The 1% first-year reduction runs for 12 months from your VAT registration date, not from when you join the scheme. It does not apply if you registered more than 12 months late. Some trades, such as gardening and landscaping, are not named in the GOV.UK table, so check HMRC's full list in VAT Notice 733 or ask the VAT helpline which category fits.
Who can use the Flat Rate Scheme?
You must be VAT registered and expect VAT turnover of £150,000 or less (excluding VAT) in the next 12 months. GOV.UK says you cannot join if you:
- left the scheme in the last 12 months,
- committed a VAT offence in the last 12 months,
- joined, or were eligible to join, a VAT group in the last 24 months,
- registered for VAT as a business division in the last 24 months,
- are closely associated with another business, or
- have joined a margin or capital goods VAT scheme.
You also cannot use it together with the Cash Accounting Scheme. The scheme is UK-wide.
Subcontractors, read this first. HMRC says you cannot use the Flat Rate Scheme for supplies under the VAT domestic reverse charge. If most of your work is for VAT-registered contractors under CIS, those sales sit outside the scheme. See our guide to VAT registration for tradespeople and the reverse charge before you decide.
The limited cost trader test
This rule decides whether you pay your trade rate or 16.5%. You are a limited cost business if your spending on relevant goods, including VAT, is either:
- less than 2% of your VAT-inclusive flat rate turnover, or
- more than 2% but less than £1,000 a year (pro-rated for shorter periods).
"Relevant goods" means goods used only for your business. HMRC excludes vehicle costs (including fuel), food and drink for you or your staff, capital items, and all services (such as insurance, phone, software and accountancy). For trades, it is mostly materials and small tools. You must check this every VAT return period.
How do you decide and join, step by step?
- Find your rate. Pick the business type that matches most of your turnover. Builders who supply materials are usually general building (9.5%). If materials are under 10% of turnover, it is labour-only (14.5%).
- Run the limited cost test. Add up relevant goods including VAT for a typical quarter and compare them with 2% of your VAT-inclusive sales and with £250 (a quarter of £1,000).
- Compare the two methods. Work out what you would pay HMRC on the normal method (VAT on sales minus VAT on costs) and on the flat rate (rate × VAT-inclusive sales). Our VAT calculator helps with the gross and net figures.
- Remove reverse charge work from the comparison, because it is outside the scheme.
- Apply to HMRC online or by post if the flat rate wins.
- Keep checking every quarter. If your costs fall, you could become a limited cost business. Leave if your income goes over £230,000.
What are the limits and deadlines?
| Rule | Figure |
|---|---|
| Join if expected VAT turnover (excluding VAT) is | £150,000 or less |
| Must leave if total income for the year is over | £230,000 (HMRC may let you stay if the next 12 months will not exceed £191,500) |
| First-year discount | 1% off your rate for 12 months from VAT registration |
| Limited cost business rate | 16.5% |
| Capital assets you can still reclaim VAT on | Certain assets over £2,000 |
| Rejoining after leaving | Not within 12 months |
There is no fee to join. Your VAT return deadlines stay the same as normal.
Worked examples: does it save money?
Example 1: a general builder (saves money)
A builder doing extensions for homeowners has £80,000 of sales excluding VAT and buys £24,000 of materials excluding VAT. Relevant goods (materials) are far above 2% of turnover, so the 9.5% rate applies.
| Normal VAT | Flat Rate (9.5%) | Flat Rate, first year (8.5%) | |
|---|---|---|---|
| VAT charged to customers | £16,000 | £16,000 | £16,000 |
| VAT-inclusive turnover | £96,000 | £96,000 | £96,000 |
| VAT reclaimed on materials | £4,800 | £0 | £0 |
| Paid to HMRC | £11,200 | £9,120 | £8,160 |
| Saving vs normal VAT | £2,080 | £3,040 |
Example 2: a labour-only decorator (costs money)
A decorator works for homeowners who buy their own paint. Sales are £60,000 excluding VAT (£72,000 including VAT). Relevant goods (brushes, fillers, tape) cost £1,200 including VAT, which is under 2% of £72,000 (£1,440). So this is a limited cost business, and the rate is 16.5%, not 14.5%. VAT on the van, fuel and phone comes to £1,000 a year.
| Normal VAT | Flat Rate (16.5%) | |
|---|---|---|
| VAT charged to customers | £12,000 | £12,000 |
| VAT reclaimed on costs | £1,200 (goods) + £1,000 (van, fuel, phone) = £2,200 | £0 |
| Paid to HMRC | £9,800 | £11,880 |
| Difference | £2,080 worse |
Even if the decorator spent enough on goods to escape the limited cost test, the 14.5% rate gives £10,440, still £640 worse than normal VAT. For low-cost, labour-heavy trades, the scheme rarely pays.
Example 3: a builder with some contractor work
Take the builder from Example 1, but say a quarter of their work (£20,000 excluding VAT) is now for a VAT-registered main contractor under CIS. That £20,000 is reverse charged, so no VAT is charged on it and it sits outside the Flat Rate Scheme. The flat rate only applies to the remaining £60,000 of homeowner work (£72,000 including VAT): 9.5% of £72,000 is £6,840. Meanwhile, the materials used on the contractor jobs still carry VAT that the builder cannot reclaim on the scheme. The more of your work moves to contractors, the less the scheme gives you, and at some point normal VAT, with refunds on your materials, wins. Rerun the comparison whenever your mix of customers changes.
What are the common mistakes?
- Applying the rate to net sales. The flat rate is a percentage of your VAT-inclusive turnover.
- Forgetting the limited cost test. It is checked every period, and it catches labour-only trades.
- Counting van fuel or insurance as relevant goods. Vehicle costs and services do not count.
- Using the scheme for reverse charge work. Those supplies are outside it.
- Forgetting the first-year discount ends. Your rate goes up by 1% after 12 months of registration.
- Staying in after a big rise in costs. If you start buying lots of materials, normal VAT may beat the flat rate.
- Not leaving when income passes £230,000.
What software helps with the Flat Rate Scheme?
Most UK accounting packages support the Flat Rate Scheme and file MTD VAT returns, so you set the rate once and the return works itself out. Xero's plans start at £18 a month ex VAT (checked 12 October 2026). Our accounting software for tradesmen guide compares Xero, QuickBooks, Sage and FreeAgent, and shows which trade job apps send invoices straight into them.
Our verdict
Join the Flat Rate Scheme if you are a general builder or materials-heavy trade selling mostly to homeowners, with turnover under £150,000. Skip it if you are labour-only, buy few materials, or work mostly for contractors under the reverse charge. Run both calculations every year.
Frequently asked questions
What is the flat rate VAT percentage for builders?
GOV.UK lists 9.5% for general building or construction services and 14.5% for labour-only building or construction services, where materials are less than 10% of turnover for those services. Any business that counts as a limited cost business pays 16.5% instead, whatever its trade. You get 1% off in your first year of VAT registration.
Who can join the Flat Rate Scheme?
VAT-registered businesses that expect VAT turnover of £150,000 or less (excluding VAT) in the next 12 months. You cannot join if you left the scheme in the last 12 months, committed a VAT offence in the last 12 months, are closely associated with another business, or have joined a margin or capital goods scheme, among other bars listed on GOV.UK.
What is a limited cost trader?
A business whose spending on relevant goods, including VAT, is less than 2% of its VAT-inclusive turnover, or more than 2% but less than £1,000 a year. Relevant goods exclude vehicle costs and fuel, food and drink, capital items and all services. Limited cost traders pay a flat rate of 16.5%, which often costs more than normal VAT accounting.
Can I use the Flat Rate Scheme for reverse charge work?
No. HMRC's VAT Notice 733 says you cannot use the Flat Rate Scheme for supplies that fall under a VAT domestic reverse charge. If you are a subcontractor billing VAT-registered contractors under CIS, those sales are reverse charged and sit outside the scheme, which removes most of the benefit.
When must I leave the Flat Rate Scheme?
HMRC's VAT Notice 733 says you must leave if your total income for the year is more than £230,000. HMRC may let you stay if it is satisfied your income in the next 12 months will not exceed £191,500. You can also leave voluntarily, but you cannot rejoin for 12 months.
Can I reclaim VAT on a new van under the Flat Rate Scheme?
Possibly. GOV.UK says that on the Flat Rate Scheme you cannot reclaim VAT on purchases except for certain capital assets over £2,000. A van bought for the business may qualify. Check HMRC's VAT Notice 733 for the conditions before you buy, because the rules on capital assets are specific.
Sources and checks
Prices, features and ratings were checked on 12 October 2026 against these sources. Software prices change often, so confirm on the vendor's site before you buy.