Should I use the VAT Flat Rate Scheme as a tradesperson?

It depends on your materials spend. In 2026-27 a builder buying plenty can save on the 9.5% rate, but a labour-only trade often counts as a limited cost business, pays 16.5% and loses out.

You must register for VAT once your taxable turnover passes £90,000 in a rolling 12 months. Once registered, the Flat Rate Scheme lets you pay HMRC a fixed percentage of your VAT-inclusive turnover instead of working out VAT on every purchase. The rules below follow GOV.UK and VAT Notice 733 as checked on 16 October 2026.

How the scheme works

• You still charge your customers VAT at the normal rate.
• You pay HMRC a flat percentage of your turnover including VAT.
• You keep the difference, but you cannot reclaim VAT on purchases, except a single capital item costing £2,000 or more including VAT.
• You can join if you expect VAT taxable turnover of £150,000 or less, excluding VAT, in the next 12 months.
• You must leave if your income goes over £230,000 including VAT.

The rates for trades

In your first year of VAT registration, each rate is 1 percentage point lower.

The limited cost trader rule

You are a limited cost business if what you spend on relevant goods, including VAT, is less than 2% of your flat rate turnover, or more than 2% but less than £1,000 a year (£250 a quarter). Then you must use 16.5%.

What counts is narrow. Relevant goods are goods used only for your business. These do not count: vehicle costs including fuel, food and drink, capital items of any value, meaning goods you keep and use for years such as a van or a computer, and anything that is a service, such as phone contracts, insurance or software subscriptions. Materials you buy and use on jobs do count.

That is why the rule bites trades that are mostly labour. A plasterer, tiler or decorator whose customer buys the materials can spend thousands on the van and still be a limited cost business. You check the test every VAT return, so a trade near the line can move in and out of 16.5%.

Two worked examples

Both work for homeowners, so no reverse charge applies, and both are past their first year.

Labour-only plasterer. Turnover £95,000 plus VAT, so £114,000 including VAT. Relevant goods of £1,500 including VAT are under 2% (£2,280), so the rate is 16.5%. Their purchases also include £3,600 of fuel and £1,500 of other costs, all including VAT.

General builder. Turnover £120,000 plus VAT, so £144,000 including VAT. Materials of £36,000 plus VAT put them well over 2%, so the rate is 9.5%. They also spend £6,000 including VAT on fuel and other costs.

In the plasterer's first year, the rate would be 15.5%, so £17,670, which is £230 less than normal accounting. From year two the scheme costs more. These are examples only. Your own figures will differ.

The reverse charge catch

If you are a CIS subcontractor working for VAT-registered contractors, much of your work falls under the VAT domestic reverse charge for building and construction. GOV.UK says it applies to most building and construction services reported within CIS between VAT-registered businesses. The contractor accounts for the VAT, not you. VAT Notice 733 says you cannot use the Flat Rate Scheme for supplies under a domestic reverse charge. A subbie who works mostly for contractors may find the scheme does little for them.

What this means for you

The scheme is a sum, not a feeling. It tends to suit a trade that buys its own materials and works for homeowners. It tends not to suit labour-only work, or work mostly for contractors under the reverse charge. Run your last year's figures both ways before you join, and rerun them each year.

Steps to decide

1. Check whether you must register: taxable turnover over £90,000 in the last 12 months, or expected in the next 30 days alone.
2. Total last year's spending on relevant goods, including VAT, leaving out van costs, fuel, food, equipment you keep for years, and services.
3. Compare it with 2% of your VAT-inclusive turnover and with £1,000. Below either line, your rate is 16.5%.
4. Work out how much of your work is under the reverse charge.
5. Calculate a year's VAT both ways, as in the table above.
6. If the scheme comes out ahead, join when you register, or apply online or by post if already registered.

The free MTD check shows when Making Tax Digital starts for your Income Tax, and the trades section has more on VAT and CIS.