VAT Flat Rate Scheme: is it worth it for a tradesman?
How the Flat Rate Scheme works, the building trade rates, and two worked quarters compared with standard VAT.
General information, not tax or legal advice. Rules change. Check GOV.UK and ask your accountant.
The Flat Rate Scheme can save a tradesman money in the middle ground, where you buy some materials but not a lot. If you sell almost pure labour, or you buy a lot of materials, it usually does not. This is general information, so check with your accountant before you join.
What the scheme is
With the Flat Rate Scheme, GOV.UK says:
- you pay a fixed rate of VAT to HMRC
- you keep the difference between what you charge your customers and pay to HMRC
- you cannot reclaim the VAT on your purchases, except for certain capital assets over £2,000
You still charge your customers VAT at the normal rate. The standard rate is 20% (GOV.UK, VAT rates). You then pay HMRC your flat rate, multiplied by your VAT inclusive turnover. That is your income plus the VAT you charged on it.
Not yet registered? Start with VAT registration threshold.
Who can join
GOV.UK says you can join if you are VAT registered and expect your VAT taxable turnover to be £150,000 or less (excluding VAT) in the next 12 months.
You cannot join if you left the scheme in the last 12 months, or if you committed a VAT offence in the last 12 months. There are other exceptions, listed on the who can join page. You also cannot use the scheme with the Cash Accounting Scheme.
The rates for building work
These are the rates GOV.UK shows on 11 November 2026:
| Type of business | VAT flat rate |
|---|---|
| General building or construction services | 9.5% |
| Labour-only building or construction services | 14.5% |
| Limited cost business (any trade) | 16.5% |
GOV.UK tells the first two apart like this: labour-only means building services where the value of the materials you supply is less than 10% of your turnover for those services. Above that, you are "general". Check the full list on GOV.UK for other trades.
You get a 1% discount in your first year as a VAT registered business.
The limited cost rule
You are a limited cost business if your goods cost less than either 2% of your turnover or £1,000 a year (if your costs are more than 2%). You then pay 16.5%, not the rate for your trade. GOV.UK has a checker that also shows which goods count.
The arithmetic matters for a fitter. 16.5% of a VAT inclusive figure is 19.8% of the net sales (16.5% × 1.2). Standard VAT is 20% of net sales, less the VAT on purchases. With almost no purchases, the two come out very close.
Worked example 1: labour-only fitter
One quarter. Net sales £15,000, all labour. Goods bought for the job: £200 plus £40 VAT.
2% of turnover is £300 on the net figure, or £360 with the VAT included. £200 of goods is below both, so this is a limited cost business at 16.5%.
| Line | Standard VAT | Flat Rate Scheme |
|---|---|---|
| VAT charged to customers (20% of £15,000) | £3,000 | £3,000 |
| Customers pay in total | £18,000 | £18,000 |
| VAT reclaimed on purchases | £40 | £0 |
| Paid to HMRC | £3,000 − £40 = £2,960 | 16.5% × £18,000 = £2,970 |
The scheme costs £10 more this quarter. Without the limited cost rule, 14.5% would be £2,610, but that rate does not apply here.
Worked example 2: supplies the materials
One quarter. Labour £10,000 and materials charged on £10,000, so net sales are £20,000. The materials cost £8,000 plus £1,600 VAT. Materials are more than 10% of turnover, so this is "general building or construction services" at 9.5%. Goods cost far more than 2%, so it is not limited cost.
| Line | Standard VAT | Flat Rate Scheme |
|---|---|---|
| VAT charged to customers (20% of £20,000) | £4,000 | £4,000 |
| Customers pay in total | £24,000 | £24,000 |
| VAT reclaimed on purchases | £1,600 | £0 |
| Paid to HMRC | £4,000 − £1,600 = £2,400 | 9.5% × £24,000 = £2,280 |
The scheme is £120 less this quarter. In the first year, with the 1% discount (8.5%), it would be £2,040.
Both examples use made up figures. Your own purchases decide the answer. On the 9.5% rate the sum tips the other way once your purchases pass about 43% of your net sales, because 9.5% of the VAT inclusive total is 11.4% of net sales, and standard VAT falls below that when purchases are that high.
When it tends to help, and when it does not
It tends to help when:
- you charge on materials but your VAT on purchases is modest compared with your turnover (example 2)
- you are in your first year, with the 1% discount
It tends not to help when:
- you sell mostly labour and buy little, so the 16.5% rate applies (example 1)
- you have a quarter with big VAT bearing purchases, because you cannot reclaim them
- you buy large items. Only certain capital assets over £2,000 can be reclaimed
Use the day rate calculator and the quote template to keep your labour and materials on separate lines.
How to join and leave
- Not registered yet: register for VAT and join the scheme at the same time.
- Already registered: apply to join online or by post.
- Leaving: you can leave at any time. You then wait 12 months before you can rejoin. You must leave if, on the anniversary of joining, your turnover in the last 12 months was more than £230,000 including VAT, or you expect it to be in the next 12 months. Details are on GOV.UK.
Some construction work between VAT registered businesses falls under the domestic reverse charge. Read GOV.UK's guidance before you invoice another contractor.