VAT Flat Rate Scheme for Trades: Worth It or Not?

The VAT Flat Rate Scheme pays off for labour-heavy trades with few purchases, and costs money for anyone buying serious quantities of materials. You charge VAT at the normal rate, pay HMRC a fixed percentage of your VAT-inclusive turnover, and keep the difference — but you give up the right to reclaim VAT on almost everything you buy. For most material-heavy trades, that trade is a bad one.

How the scheme works

Normally, you pay HMRC the VAT you charged customers minus the VAT you paid on purchases. Under the Flat Rate Scheme, you skip the second half. You apply a fixed percentage to your VAT-inclusive turnover and pay that, keeping whatever is left of the VAT you charged.

You still charge customers VAT at 20% as usual. Nothing changes on your invoices.

What changes is that you cannot reclaim VAT on your purchases, with one exception: capital assets costing over £2,000 including VAT in a single purchase. A £3,000 van fit-out or a £2,500 machine still gets its VAT reclaimed. A £900 tool does not.

You can join if your VAT turnover is £150,000 or less excluding VAT. You must leave once you are no longer eligible, and after leaving you have to wait twelve months before rejoining.

The rates that apply to trades

Two categories cover most trade businesses, and the distinction between them matters a lot.

Labour-only building or construction services: 14.5%. This applies where the value of materials you supply is less than 10% of your turnover for those services.

General building or construction services: 9.5%. This is where materials come to more than 10% of turnover.

There is also a 1% discount in your first year as a VAT-registered business, which makes the first twelve months noticeably better than the ones after.

Getting the category right is not optional. A plumber supplying boilers and pipework is general construction at 9.5%; a labour-only subcontractor on a site, supplying nothing but skill, is at 14.5%. Applying the wrong one is an assessment waiting to happen.

The limited cost business trap

This is the part that catches trades out most often, and it exists precisely because the scheme was being used in ways HMRC did not intend.

You are classed as a limited cost business if your spending on goods is less than either 2% of your turnover, or £1,000 a year where your costs are more than 2%. If you fall into that category, your flat rate is 16.5% regardless of your trade.

At 16.5% of VAT-inclusive turnover, you are handing over very nearly all the VAT you collected. The scheme stops being a saving and becomes an administrative inconvenience.

“Goods” is defined narrowly. It excludes capital expenditure, food and drink, vehicles and vehicle parts (with limited exceptions), and — importantly — services of any kind. Subcontractor labour is a service, not goods. So a labour-only subcontractor who buys a few consumables and pays other subbies for the rest can easily land at 16.5%.

The test applies each VAT period, not once. Your rate can change quarter to quarter. HMRC provides a calculator for working it out, and any decent accounting software will flag it, but you have to actually check.

When the Flat Rate Scheme is worth it

Run the sum properly rather than guessing. Take a typical quarter and calculate your VAT bill both ways: normal accounting, and flat rate at your category percentage. Do it over a full year, because material purchases are lumpy.

Broadly, it favours you when:

Your work is mostly labour with modest material content — but not so modest that you fall into the limited cost band.

Your customers are mostly members of the public, who cannot reclaim VAT anyway, so your prices are not affected by the scheme either way. (If you sell to VAT-registered businesses, they can usually reclaim the VAT you charge, so the scheme does not change what they pay either.)

Your purchases are mostly from non-VAT-registered suppliers, so there was little input VAT to reclaim in the first place.

You value the reduced bookkeeping and the predictability.

It works against you when:

You buy significant quantities of materials — kitchens, bathrooms, boilers, timber, tiles.

You are about to make a large purchase below the £2,000 capital threshold.

You are a limited cost business, or hovering near the boundary.

You use a lot of subcontract labour, which counts as services rather than goods.

The domestic reverse charge complication

If you work in construction and your customers are VAT-registered contractors, the domestic reverse charge for building and construction services is likely to apply to your invoices. Under the reverse charge, you do not charge VAT on those supplies — the customer accounts for it.

This interacts badly with the Flat Rate Scheme. Reverse charge sales are excluded from your flat rate turnover, which means you may end up paying a flat rate percentage on a much smaller base while still being unable to reclaim VAT on your purchases. For many subcontractors, the reverse charge made the Flat Rate Scheme unattractive or actively loss-making.

If a meaningful share of your work is for other contractors rather than end users, this is the first thing to check with your accountant. It is a common reason trades have left the scheme.

The genuine advantage: simplicity

The scheme’s real selling point is not always the money. It is that your VAT return becomes a single calculation on turnover rather than a reconciliation of every purchase invoice.

For a sole trader who does their own books, that is worth something — although with Making Tax Digital requiring digital records anyway, the saving is smaller than it once was. If you are recording every transaction digitally regardless, the reclaim side is largely automated.

Weigh the simplicity against the pounds, and be honest about which one you are actually buying.

How to decide, in four steps

Pull your last twelve months of sales and purchases.

Calculate what you paid in VAT under normal accounting.

Calculate what you would have paid at your flat rate percentage on VAT-inclusive turnover, checking each period against the limited cost test.

Compare, then ask your accountant to sanity-check the categorisation and the reverse charge position.

If the difference is small, stay where you are. Switching schemes has its own admin cost, and you cannot rejoin for twelve months if you leave.

Keeping the turnover side working

Whichever scheme you use, the maths only helps if the work is there. Trade Pilot is free to join, charges only when a real local job lands in your inbox, and sells each lead to no more than three trades in an area. There is no monthly subscription, so lead spend sits cleanly against the jobs it produced — which makes it easy to see in your figures rather than buried in a fixed cost.

Frequently asked questions

What is the flat rate percentage for builders?

General building or construction services is 9.5%, and labour-only building or construction services is 14.5%. Labour-only means materials are less than 10% of turnover for those services. There is a 1% discount in your first year of VAT registration.

What is a limited cost business?

One whose spending on goods is less than 2% of turnover, or more than 2% but less than £1,000 a year. Limited cost businesses pay 16.5% regardless of trade, which usually wipes out any benefit.

Can I reclaim VAT on tools under the Flat Rate Scheme?

Only on capital assets costing more than £2,000 including VAT in a single purchase. Individual tools below that are not reclaimable.

Does the domestic reverse charge affect the Flat Rate Scheme?

Yes, significantly. Reverse charge supplies are excluded from flat rate turnover, which for many construction subcontractors makes the scheme unattractive. Check this specifically with your accountant.

What is the turnover limit to join?

VAT turnover of £150,000 or less excluding VAT. You must leave the scheme when you are no longer eligible.

Can I rejoin after leaving?

Not immediately. You have to wait twelve months after leaving before you can rejoin, so treat the decision as more than a one-year experiment.

Related reading: VAT threshold for trades · domestic reverse charge VAT · tax deductions for tradesmen · sole trader vs limited company