VAT Flat Rate Scheme vs standard VAT for a limited company: which leaves more profit?

In short: It depends on costs. A company on the Flat Rate Scheme pays a percentage of VAT-inclusive turnover and usually cannot reclaim input VAT (GOV.UK: VAT Flat Rate Scheme). Taxley files the Company Tax Return (CT600) for £39.95 with micro-entity accounts, and files the accounts at Companies House once the return is paid and the accounts are finished.

Take the 30-second check to see whether Taxley fits your company, or see the price for your company.

Key facts (checked on 21 October 2026)

Which scheme leaves a limited company more profit?

Neither scheme leaves more profit in every case. Standard VAT pays HMRC the VAT charged minus the VAT reclaimed, and that difference stays out of profit. The Flat Rate Scheme pays a percentage of VAT-inclusive turnover, and any amount kept is taxable profit. What the company spends on goods and services decides which route leaves more.

The scheme changes the payment to HMRC, not the rate on the invoice. A standard-rated sale is still 20%, the rate since 4 January 2011 (GOV.UK: VAT rates). Standard accounting pays over the VAT charged and reclaims VAT on purchases where the rules allow. The Flat Rate Scheme pays a percentage of VAT-inclusive turnover and does not reclaim VAT on ordinary purchases, apart from certain capital assets over £2,000 (GOV.UK: VAT Flat Rate Scheme). Money kept above the flat payment increases taxable profit. Where the input VAT given up is larger, standard accounting leaves more profit. Talk to an accountant or tax adviser before joining or leaving.

Who can join the Flat Rate Scheme, and when must the company leave?

A VAT-registered company can join if it expects VAT taxable turnover of £150,000 or less, excluding VAT, in the next 12 months. It must usually leave if, on an anniversary of joining, income for the past year is more than £230,000 including VAT. It can also leave by choice, and then waits 12 months before it can rejoin.

VAT taxable turnover is everything sold that is not VAT exempt (GOV.UK: who can join). Joining is refused after a departure or a VAT offence in the last 12 months, a VAT group or divisional registration in the last 24 months, a close association with another business, or use of a margin scheme or the capital goods scheme. Capital-asset supplies and reverse-charge services are ignored for the £150,000 test (regulation 55L). The company must usually leave if the past year's income, including VAT, is more than £230,000, unless HMRC is satisfied the next year will not exceed £191,500, and also if the next 30 days alone are expected to exceed £230,000. Those tests ignore capital-asset supplies (regulation 55M). Rejoining waits 12 months (GOV.UK: leaving the scheme).

What flat rate does the company pay, including limited cost traders?

A limited cost trader pays 16.5% of VAT-inclusive turnover, or 15.5% while the first-year reduction also applies. Any other trader uses one sector percentage for the whole of its turnover. Management consultancy is 14% in the statutory table, and 13% in the first year of VAT registration. The percentage applies to turnover that already includes VAT.

If more than one category is expected, only the main activity by turnover is used, and the turnover is not split (regulation 55K, VAT Notice 733, paragraph 4.8). Computer and IT consultancy or data processing is 14.5%, accountancy or book-keeping is 14.5%, and any other activity not listed elsewhere is 12%. Limited-cost treatment replaces that table when relevant goods, including VAT, are under 2% of VAT flat rate turnover, or over 2% but under £1,000 a year, which is £250 a quarter (VAT Notice 733, paragraph 4.4). That test is made each VAT period. Services and capital expenditure goods are not relevant goods, so rent, downloaded software or a laptop does not by itself bring in the sector rate (VAT Notice 733, paragraph 4.6). The 1% reduction ends the day before the first anniversary of VAT registration, not of joining, and it is refused if HMRC learned of the liability more than a year later (regulation 55JB). With the limited-cost rule, that year is taxed at 15.5% (regulation 55KA).

When can a Flat Rate Scheme company reclaim input VAT?

Input VAT on ordinary purchases is not reclaimed on the Flat Rate Scheme. The exception is capital expenditure goods whose value, together with the VAT, is more than £2,000. A purchase of exactly £2,000 including VAT does not qualify. Standard accounting can reclaim input VAT on much smaller taxable costs, where the normal rules allow it.

Regulation 55E gives credit for the whole of the input tax on that capital purchase. Stock and goods bought to hire out do not qualify. Reclaimed VAT comes out of the cost, and VAT left unreclaimed stays in it. HMRC's illustration is a machine at £2,400 including £400 of VAT: £2,000 if the VAT is reclaimed, and £2,400 if it is not (HMRC manual BIM31585). Goods for resale, goods to be let, goods used up within a year, and capital-goods-scheme items are outside that concession. A photographer on 11% who bills £1,000 plus VAT pays 11% of £1,200, which is £132 (GOV.UK: how much you pay).

How does the flat-rate difference affect Corporation Tax?

The amount kept on the Flat Rate Scheme is taxable profit. Turnover is usually the VAT-inclusive takings less the flat-rate payment, so the gap increases profit. Showing the flat-rate payment as an expense leaves the same profit. Under standard VAT, the VAT balance stays on the balance sheet and outside the profit.

Only the flat-rate VAT goes to the VAT account, plus VAT reclaimed on a qualifying capital asset. Expenses generally include the irrecoverable VAT (HMRC manual BIM31585). Box 145 takes turnover from the accounts (does turnover on the CT600 include VAT?). For the financial year starting 1 April 2026, profits of £50,000 or less pay 19% and profits over £250,000 pay 25%, with marginal relief in between (GOV.UK: Corporation Tax rates). The fraction is 3/200 (rates and allowances). Short periods and associated companies reduce both limits. Where augmented profits equal taxable total profits, relief is 3/200 × (£250,000 − the profit), so an extra pound bears 26.5% (CTA 2010, section 18B). See how to calculate Corporation Tax and marginal relief.

How much profit is left from £90,000 of consultancy sales?

With £90,000 of net sales, £600 of relevant goods leaves £58.80 more after Corporation Tax on the Flat Rate Scheme. £30,000 of relevant goods leaves £2,293.20 more on standard VAT. Both results use the financial year starting 1 April 2026, and there is no first-year 1% reduction.

The company is a UK resident management consultancy and not a close investment-holding company. The period is 12 months inside the financial year starting 1 April 2026, with no associated companies, so the limits stay at £50,000 and £250,000. There are no exempt distributions, so augmented profits equal taxable total profits. Every sale is standard-rated at 20%. Output VAT is £90,000 × 20% = £18,000 and gross takings are £108,000. Sales and goods purchases occur evenly across four quarterly VAT periods, so each quarter has £27,000 of gross turnover and one quarter of the annual goods cost (VAT Notice 733, paragraph 4.4). The goods are relevant goods, not capital assets. Under standard VAT, assume they are wholly for the business, supported by valid VAT invoices and eligible for full recovery (GOV.UK: reclaim VAT on business expenses). Take advice before joining or leaving. The figures compare only those assumptions.

£600 of relevant goods, including VAT. Each quarter has £150 of goods, below both 2% of £27,000 (£540) and the quarterly £250 threshold, so the rate is 16.5% (VAT Notice 733, paragraph 4.4). The annual payment is £108,000 × 16.5% = £17,820. The company keeps £180. Accounts turnover is £108,000 − £17,820 = £90,180, the £600 stays in expenses, and profit is £89,580. Standard accounting reclaims £100, which is £600 × 20/120, deducts £500, and leaves profit of £89,500. The scheme is £80 ahead before tax. Tax at 25%, minus 3/200 × (£250,000 − the profit), is £19,967.50 on standard accounting and £19,988.70 on the scheme. After tax the scheme leaves £69,591.30 against £69,532.50, a gap of £58.80. The extra £80 of profit bears £21.20 of tax at 26.5%.

£30,000 of relevant goods, excluding VAT. Input VAT is £6,000, so the annual bill is £36,000 including VAT. Each quarter has £9,000 of goods, above both 2% of £27,000 (£540) and the quarterly £250 threshold, so the rate is 14% (VAT Notice 733, paragraph 4.4). The annual payment is £108,000 × 14% = £15,120. The company keeps £2,880 and gives up £6,000 of input VAT. Turnover in the accounts is £92,880, expenses are £36,000, and profit is £56,880. Standard accounting deducts £30,000 and leaves £60,000, so it is £3,120 ahead before tax. Corporation Tax, on the same marginal-relief sum, is £12,150 and £11,323.20. Profit after tax is £47,850 and £45,556.80. Standard accounting leaves £2,293.20 more. The £3,120 gap bears £826.80 of tax at 26.5%. A first VAT year would use 15.5% and 13%, so these totals would change.

When does each scheme tend to suit a limited company?

The Flat Rate Scheme tends to suit a company with low relevant goods and little reclaimable VAT. Standard VAT tends to suit a company that can reclaim substantial VAT on goods or services. At 16.5%, little of the VAT charged is kept, and input VAT on costs is still given up, so the scheme often leaves less profit.

A few hundred pounds of stationery leaves only a thin slice of the VAT charged, and Corporation Tax is due on that slice. The first year of registration widens the slice, because 16.5% becomes 15.5% and 14% becomes 13%. Services are not relevant goods, so rent or downloaded software need not move the company off 16.5%, while the VAT on them may still be reclaimed under standard accounting. Once the VAT given up exceeds the gap between 20% and the flat percentage, standard accounting leaves more after tax. An accountant or tax adviser applies the tests to the real invoices (GOV.UK: VAT Flat Rate Scheme).

What does Taxley do with VAT on the Company Tax Return?

Taxley does not calculate flat-rate VAT or file a VAT return. You enter turnover, which feeds box 145. On the Flat Rate Scheme, accounts turnover is usually VAT-inclusive takings less the flat-rate payment. Taxley files micro-entity accounts at Companies House once the return is paid and the accounts are finished, for £39.95.

Taxley (taxley.co.uk), UK online software that prepares and files the Company Tax Return (CT600) with HMRC and the annual accounts with Companies House. Simple mode asks for sales "after trade discounts and net of VAT", and a trade is asked for total sales "net of VAT (on an accruals basis)". Those prompts are not suitable for Flat Rate Scheme accounts turnover: work out the correct accounts figure before entering it. A trial-balance VAT line is a balance-sheet debtor or creditor unless you place it on the profit and loss. Main rate, small profits rate and marginal relief then apply to that profit. VAT returns, Self Assessment and Making Tax Digital for Income Tax are not supported. Taxley does not give tax advice, and it does not calculate the VAT capital goods scheme. An LLP number is explained as a partnership return (SA800) rather than a Company Tax Return, and Taxley does not charge. Micro-entity accounts use £39.95, and small-company accounts use £129.

Take the 30-second check to see whether Taxley fits your company, or see the price for your company.

Frequently asked questions

Does the first-year reduction turn 16.5% into 15.5%?

Yes, when the newly registered period and limited-cost rule both apply. Regulation 55KA sets the rate at 15.5%, rather than reducing 16.5% by another 1%. The window ends the day before the first anniversary of VAT registration, not 12 months after joining. There is no reduction if HMRC learned of the liability more than a year late.

Can the Flat Rate Scheme be used alongside cash accounting?

No. GOV.UK says the Flat Rate Scheme cannot be used with the Cash Accounting Scheme. The scheme has its own cash-based turnover method, which applies the percentage to VAT-inclusive supplies for which the business has been paid. A turnover method, once chosen, is kept for at least 12 months.

Is input VAT on a £2,000 purchase reclaimable on the scheme?

Only if the capital goods cost more than £2,000 including VAT. Regulation 55E gives credit where the value, together with the VAT, is more than £2,000. A purchase of exactly £2,000 including VAT does not meet that test. Ordinary goods and services below it are not reclaimed on the scheme.

Does Taxley send the VAT return to HMRC?

No. VAT returns are not supported, and nor are Self Assessment or Making Tax Digital for Income Tax. You type the turnover. On the Flat Rate Scheme that figure is usually VAT-inclusive takings less the flat-rate payment, and box 145 uses what you enter. Taxley does not calculate the percentage.

Is the Flat Rate Scheme restricted to limited companies?

No. Any VAT-registered business that meets the joining tests can use it, including a sole trader. The Corporation Tax rates in the sums apply to companies. Taxley prepares a Company Tax Return for a limited company. An LLP files a partnership return (SA800), which Taxley does not prepare.

General information, not personalised tax or accounting advice. Rates and rules checked on 21 October 2026.