The VAT flat rate scheme
Updated 7 November 2026
The flat rate scheme can leave an IT contractor a few thousand pounds a year, or almost nothing. At £110,000 of turnover, the 14.5% IT rate keeps £2,860 in the company. The 16.5% limited cost trader rate keeps £220. Which rate you are on is the whole question.
Under standard VAT you charge 20% on your invoices, reclaim the VAT on what you buy, and pay HMRC the difference. The flat rate scheme replaces that with one percentage of your VAT-inclusive turnover, and in exchange you reclaim almost nothing.
When you must register
You have to register once taxable turnover in any rolling 12 months passes £90,000, or when you expect it to within the next 30 days. Rolling means any 12 months ending today, not your accounting year or the tax year. You can deregister if turnover falls below £88,000.
At £500 a day for 220 days you bill £110,000, so most full-time contractors are over the line.
How the sum works
You still charge clients 20%, and the invoice does not change. What changes is what you pay over. Instead of 20% of net sales less input VAT, you pay HMRC a flat percentage of gross, VAT-inclusive turnover and keep the rest.
The percentage depends on your trade. Computer and IT consultancy is 14.5% and management consultancy is 14%. In your first year of VAT registration you take 1% off whichever rate applies.
Take £110,000 of net turnover. You invoice £132,000 including VAT, and the £22,000 of VAT is what a standard-scheme company with no input VAT would pay over. At the flat rate of 14.5% you pay 14.5% of £132,000, which is £19,140. The difference, £2,860, stays in the company. In the first year, at 13.5%, you pay £17,820 and keep £4,180.
That surplus is company income and is taxed as profit for corporation tax. The real gain is smaller than the headline, but it is still a gain.
You cannot reclaim VAT on costs under the scheme, with one exception: capital goods costing over £2,000 including VAT.
The limited cost trader rate
This is where the scheme stops working for many contractors. If your spending on goods is under 2% of turnover, or under £1,000 a year, you are a limited cost trader and your rate is 16.5% whatever your trade.
On the same £132,000 gross, 16.5% is £21,780. Against the £22,000 you charged, that leaves £220 for a year of extra bookkeeping, and you have given up reclaiming VAT on anything you buy.
Goods means physical things the business buys to use or sell. A typical IT contractor working from a laptop rarely buys enough to pass either test, so assume the 16.5% rate unless you have checked.
When it stops paying
The scheme suits a company with a trade rate, almost no VAT-able costs and turnover comfortably inside the limits. It stops paying when one of those changes.
You start buying things with VAT on them: equipment, subcontractors, a serious software bill. Under standard VAT you would reclaim that. Under the flat rate you cannot, and the surplus shrinks or disappears.
You become a limited cost trader. The 16.5% rate wipes out the margin, as above.
Your turnover approaches the ceiling. You cannot join the scheme if turnover is over £150,000 excluding VAT, so a rate rise or a busy year can push you out.
Your clients are overseas. Supplies to business clients outside the UK usually carry no UK VAT, and how they interact with the scheme needs checking before you rely on a surplus.
What to do
Run both schemes on your actual turnover and costs once a year. The difference is usually a few thousand pounds one way or the other, and the direction can change.