Flat Rate VAT Return vs Standard VAT: Key Differences Explained

Differences Between Standard and Flat Rate VAT Returns

VAT (Value Added Tax) is an essential part of doing business in the UK, and understanding the right VAT scheme for your company can significantly impact your cash flow and accounting processes. Among the most common options available are the Standard VAT Return method and the Flat Rate VAT Return scheme. Both serve the same purpose—to ensure businesses pay the correct amount of VAT to HMRC—but they function in very different ways. In this article, we will explore the differences between the standard and flat rate VAT return, the pros and cons of each, eligibility requirements, industry-specific considerations, and how to determine which scheme suits your business best.  

What Is a VAT Return?

A VAT return is a form that VAT-registered businesses must submit to HMRC—typically every quarter—summarizing the VAT they’ve charged customers and the VAT they’ve paid on purchases. The difference is what you either pay to or reclaim from HMRC. Businesses can submit their VAT returns using the standard method or opt into the Flat Rate VAT Return scheme, depending on their circumstances.  

What Is a Standard VAT Return?

The standard VAT return is the default method used by most VAT-registered businesses in the UK. Under this scheme:
  • You charge VAT on your sales (output tax).
  • You reclaim VAT on eligible purchases (input tax).
  • You report the difference to HMRC via your VAT return.
This method requires detailed bookkeeping and accurate records of all sales and expenses, including proper VAT invoices.  

What Is a Flat Rate VAT Return?

The Flat Rate VAT Return scheme is designed to simplify VAT accounting for small businesses. Rather than calculating the difference between VAT charged and VAT paid, you:
  • Charge VAT at the standard rate (typically 20%) on your sales.
  • Pay HMRC a fixed percentage of your total (gross) turnover, depending on your industry.
  • You cannot reclaim VAT on most purchases, except capital assets over £2,000.
This method reduces administrative burdens but may cost more in certain scenarios.  

Key Differences Between Standard and Flat Rate VAT Returns

Let’s break down the main differences between the two schemes:

1. VAT Calculation

  • Standard VAT Return: You calculate the actual VAT on every purchase and sale.
  • Flat Rate VAT Return: You pay a fixed rate of your gross turnover, specific to your industry.
Example: If your business falls under an 11% flat rate and you invoice £10,000 (including VAT), you pay £1,100 to HMRC.  

2. Record-Keeping

  • Standard: Requires keeping track of all VAT on sales and purchases.
  • Flat Rate VAT Return: Simplified record-keeping since you don’t claim back most VAT on purchases.
 

3. VAT Reclaim

  • Standard: You can reclaim VAT on all eligible purchases.
  • Flat Rate VAT Return: You generally cannot reclaim VAT, except on certain capital assets.
 

4. Industry-Specific Rates

Each industry has a different flat rate VAT return percentage. For example:
  • IT consultancy: 14.5%
  • Hairdressing: 13%
  • Pubs: 6.5%
HMRC sets these rates and should be reviewed regularly.  
  1. Eligibility Criteria
Not all businesses are eligible to use the flat-rate VAT return scheme. To qualify:
  • Your annual taxable turnover must be £150,000 or less (excluding VAT).
  • You must not have been in the scheme in the previous 12 months.
  • You must apply to HMRC to join.

6. Time Savings

  • Standard: Time-consuming; more complex accounting.
  • Flat Rate VAT Return: Time-saving; ideal for small businesses with simple accounting needs.

Pros and Cons of the Flat Rate VAT Return

Pros

  1. Simplicity: Less paperwork and simpler accounting.
  2. Predictability: A fixed rate makes cash flow forecasting easier.
  3. Initial 1% Discount: First-year businesses using the flat rate VAT return get a 1% discount.

Cons

  1. Limited VAT Reclaim: You can’t reclaim VAT on most purchases.
  2. May Cost More: If you buy many VAT-rated goods, the flat rate may result in paying more to HMRC.
  3. Not Flexible: Fixed rate means no benefits during low-expense periods.

Who Should Choose the Flat Rate VAT Return?

This scheme is best for:
  • Service-based businesses with low VAT expenses.
  • Freelancers, consultants, and contractors.
  • Small businesses want to simplify compliance.
Example: An IT consultant who incurs minimal expenses could benefit from the flat rate VAT return, as they avoid tracking every purchase.   Who Should Use the Standard VAT Return?
  • Businesses with high VAT-related purchases.
  • Product-based businesses with lots of stock or capital equipment.
  • Businesses are looking to reclaim VAT wherever possible.
If you spend a lot on materials or wholesale items, the standard scheme often results in a lower net VAT payment.  

Real-Life Example: Comparing Two Methods

Business A – Uses Standard VAT Return

  • Charges VAT: £4,000
  • Reclaims VAT on expenses: £2,500
  • Pays HMRC: £1,500

Business B – Uses Flat Rate VAT Return (12% rate)

  • Total gross turnover: £20,000
  • Pays HMRC: £2,400 (12% of 20,000)
  • Cannot reclaim £2,500 on purchases
Result: Business B ends up paying more VAT overall due to no input reclaim.

Flat Rate VAT Return for Limited Cost Traders

HMRC has a special rule for businesses that spend very little on goods: the limited cost trader rule. If you spend less than 2% of turnover or less than £1,000 per year on goods (not including services), you must use a higher flat rate of 16.5%. This rule prevents service-based businesses from unfairly benefiting from the flat rate system.

How to Apply for the Flat Rate VAT Return Scheme

  1. Register for VAT with HMRC (if not already registered).
  2. Check your eligibility.
  3. Apply online or via your VAT registration form.
  4. Choose the correct flat rate for your industry.
  5. Start using the scheme from your next VAT return period.
You can leave the scheme voluntarily, or you will be removed automatically if your turnover exceeds the threshold.  

When to Switch Between Schemes

You can switch from the flat rate VAT return scheme to the standard method if your expenses increase or you start dealing with more VAT-rated goods. Conversely, switching to the flat rate may be smart if your admin workload is growing and your input VAT is minimal. Consult an accountant or tax advisor to guide you in making the right choice.  

Conclusion

Choosing between the standard VAT return and the flat rate VAT return scheme depends on your business model, turnover, and level of expenses. While the standard method offers precision and flexibility, the flat rate VAT return simplifies accounting and helps small businesses save time. However, it’s crucial to evaluate whether the flat rate will cost you more in VAT payments, especially if your business incurs high expenses or capital costs. If you’re unsure which VAT scheme is best for your business, consider seeking professional advice. An accountant can run the numbers and help you select the option that supports both compliance and profitability

Contact us today to learn more about how we can help with your VAT return needs.

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FAQs

Generally, no. One of the key features of the flat rate VAT return scheme is that you cannot reclaim VAT on most purchases. However, you can still reclaim VAT on capital asset purchases over £2,000 if they meet HMRC’s criteria.

Not always. While the flat rate VAT return scheme simplifies VAT reporting, it’s not cost-effective for businesses with high VAT expenses. Service-based businesses with few overheads benefit the most.

If your total VAT-inclusive turnover exceeds £230,000, you must leave the flat rate VAT return scheme and switch to the standard VAT accounting method. You should inform HMRC promptly.

Yes, but only after 12 months have passed since you left the scheme. You must also meet all the eligibility criteria again to rejoin the flat rate VAT return scheme.