Flat Rate VAT Scheme: Is It Still Worth It for Builders?

‍‌‌​​​‌‌​‌​‌‌​​​​​​‌‌‌‌​​‌‌‌‌‌​‌‍SiteKiln gives you plain-English information, not legal advice. If you need advice specific to your situation, talk to a qualified accountant or VAT adviser.

The short version

The VAT Flat Rate Scheme (FRS) lets small VAT-registered businesses pay HMRC a fixed percentage of their VAT-inclusive turnover, instead of working out VAT on every in and out. You still charge your customers 20% (or 5%/0% where relevant), but instead of reclaiming input VAT on most purchases, you hand HMRC a flat slice of your gross sales. With the current "limited cost trader" rules, most labour-only trades in construction are forced onto a high 16.5% flat rate, which kills most of the old benefit.

Why it matters

Get FRS wrong and you can easily end up paying more VAT than on normal VAT, or having to repay "extra" you've been keeping if HMRC say you've used the wrong rate or you were really a limited cost trader. For a small builder, that's the difference between the scheme giving you a bit of margin and it quietly stripping thousands out of your year's profit.

Section 26B of the VAT Act 1994 lets HMRC run a flat rate scheme where, if you opt in, your VAT liability is a fixed percentage of your VAT-inclusive turnover, with no normal input VAT claims. HMRC's Flat Rate Scheme guidance (VAT Notice 733) and the online FRS page lay out the rules: who can join, sector percentages, how to work out the limited cost trader rate, and when you have to leave.

In construction, this breaks into three questions:

• Can you join the scheme?
• Would you be treated as a limited cost trader?
• Given your mix of labour vs materials, would FRS actually leave you better off than normal VAT?

5.13.1 Who can use the Flat Rate Scheme

HMRC say you can join FRS if:

• You're VAT-registered (or registering), and
• Your expected VAT-taxable turnover in the next 12 months is £150,000 or less (excluding VAT).

Once you're in, you must leave if:

• Your VAT-inclusive turnover is expected to exceed £230,000 in the next 12 months, or
• It actually goes over £230,000 at your FRS anniversary point and you don't qualify for any concession.

You also can't use FRS if, for example, you've been in and left in the last 12 months, or you're closely associated with another business in a way that HMRC see as "artificial separation".

For new VAT registrations, there's a 1% discount off your flat rate percentage for the first year from your VAT registration date.

5.13.2 How the Flat Rate Scheme actually works

On FRS:

• You charge VAT to customers as normal -- usually 20% on standard-rated work.
• Each VAT period, you add up your VAT-inclusive sales (everything you invoiced including VAT).
• You pay HMRC your flat rate percentage (based on your sector, or 16.5% if you are a limited cost trader) of that VAT-inclusive total.
• You normally cannot reclaim input VAT on purchases, except for some capital assets over £2,000 in a single invoice.

So your "profit" from FRS is basically:

• VAT you charged customers minus
• Flat-rate VAT you pay HMRC.

If you're on a relatively low flat rate and you don't have loads of VAT on your costs, you can come out ahead. If you're on the 16.5% limited-cost rate, that margin is minimal.

5.13.3 Limited cost trader -- why it hurts labour-only trades

Since 2017, HMRC apply a 16.5% flat rate to "limited cost traders" using FRS.

You're a limited cost trader if your VAT-period spend on goods (not services) that count is:

• Less than 2% of your VAT-inclusive turnover, or
• Less than £1,000 a year if your turnover is over £50,000.

"Goods" for this test exclude things like:

• Vehicles, fuel, and parts (unless you're in certain transport categories).
• Food and drink.
• Capital assets (computers, big kit).
• Phones, laptops and most electronic devices.

Most labour-only contractors -- including many one-man trades where the contractor supplies labour and some services but not a lot of materials -- fall into limited cost trader territory, so they're forced onto the 16.5% rate.

On standard-rate work, here's what that means:

• You charge 20% VAT to your customer (so £20 on each £100 net).
• On FRS at 16.5%, you pay HMRC 16.5% of £120 = £19.80.
• Your "gross margin" on VAT is just 20p in £120, before any input VAT you can't reclaim.

That's not much of a win, and for many trades it's worse than normal VAT once you factor in VAT on fuel, kit and other costs you're giving up.

5.13.4 Is FRS worth it for a small builder?

In 2026, the consensus from tax guides is roughly:

FRS can still help if:

• Your turnover is comfortably under £150k.
• You're not a limited cost trader -- meaning you buy a decent amount of qualifying goods (materials, consumables, etc.) relative to turnover, so you can use a lower sector rate instead of 16.5%.
• Your work is mostly B2B, and your customers don't care whether you're on FRS or normal VAT.
• You value simplicity -- one calculation on VAT-inclusive turnover instead of line-by-line input VAT.

FRS is usually not worth it (or actively bad) if:

• You're effectively labour-only, so the limited cost trader 16.5% rate applies most periods.
• You buy a lot of VAT-bearing kit, fuel and materials and want to reclaim that input VAT in full.
• You regularly have VAT repayments under normal VAT -- HMRC themselves say FRS isn't designed for that.

For many sole-trader trades and small limited companies in construction, modern advice is: run the numbers both ways and, if you look like a limited cost trader more often than not, standard VAT is safer and usually cheaper in the long run.

5.13.5 Eligibility and leaving -- the key thresholds

Summary of the current key numbers from HMRC's guidance:

To join FRS:

• Expected VAT-taxable turnover in next 12 months must be £150,000 or less (excluding VAT).

You must leave if:

• Your VAT-inclusive turnover is expected to be more than £230,000 in the next 12 months, or
• It actually exceeds £230,000 and HMRC don't agree you can stay.

First year discount:

• You can knock 1% off your flat rate percentage for the first year starting from your date of VAT registration (not the date you join FRS).

If HMRC think you've used the wrong sector percentage, or you've ignored the limited cost trader test when it should apply, they can go back, re-work your returns and charge extra VAT plus interest and possibly penalties.

Flat rate vs normal VAT -- two quick examples

Assume all work is standard-rated at 20%, and both are under the FRS £150k turnover limit.

1) Materials-heavy small builder (FRS might help)

You:

• Do £80,000 net sales to VAT-registered customers.
• Charge 20% VAT: £16,000.
• Total VAT-inclusive turnover: £96,000.
• Spend £35,000 on VAT-bearing materials and goods (qualifying goods), plus other costs.

On normal VAT:

• Output VAT: £16,000.
• Input VAT on materials (at 20%): £35,000 x 20% = £7,000.
• Ignore other reclaimable VAT for simplicity.
• Net VAT to HMRC ≈ £9,000.

On Flat Rate Scheme (assume you qualify for, say, a 9.5% building-related flat rate and you're not a limited cost trader):

• VAT-inclusive turnover: £96,000.
• Flat rate VAT: 9.5% x £96,000 ≈ £9,120.
• You generally can't reclaim input VAT on materials (except certain big assets).

Result:

• Normal VAT bill ≈ £9,000.
• FRS bill ≈ £9,120.
• You're actually slightly worse off on FRS here -- and that's before losing input VAT on fuel, tools, etc. Once you factor all that in, normal VAT usually wins for a materials-heavy builder.

2) Labour-only contractor (limited cost trader -- FRS hurts)

You:

• Do £80,000 net in labour-only work for VAT-registered contractors.
• Charge 20% VAT: £16,000.
• VAT-inclusive turnover: £96,000.
• Spend very little on qualifying goods (fuel, cars, phones etc. mostly don't count for the limited cost test).

You fail the goods test, so you're a limited cost trader and must use the 16.5% flat rate:

On normal VAT:

• Output VAT: £16,000.
• Minimal input VAT to reclaim (say £1,000).
• Net VAT to HMRC ≈ £15,000.

On FRS limited cost trader:

• VAT-inclusive turnover: £96,000.
• Flat rate VAT: 16.5% x £96,000 = £15,840.
• Little or no input VAT reclaim allowed.

Result:

• Normal VAT ≈ £15,000.
• FRS ≈ £15,840.
• You'd be paying about £840 more VAT a year on FRS here, plus giving up any input VAT on fuel and small kit you might otherwise reclaim.

That's why, for most labour-only or low-materials trades, modern advice is to treat FRS -- especially with the 16.5% limited cost rate -- as a red flag unless an accountant can show a very specific saving in your numbers.

Flat rate VAT -- quick sense-check

Flat rate might be worth a look if:

• Your VAT-taxable turnover is under £150k and you're likely not a limited cost trader (you buy a fair amount of qualifying goods like materials and consumables).
• You don't claim huge amounts of input VAT now, and you value a very simple VAT calculation each quarter.

Flat rate is probably a bad fit if:

• You're largely labour-only or low on qualifying goods, so you'd be hit by the 16.5% limited cost trader rate most periods.
• You regularly reclaim a lot of VAT on materials, fuel, plant or other costs -- normal VAT likely leaves you better off.

Bottom line: if you can't see clearly, with your own numbers, how FRS beats normal VAT once limited cost rules are applied, get your accountant to model it before you tick any boxes.

What to do next

• Ask your accountant to model normal VAT vs Flat Rate Scheme using your actual numbers, not rough guesses.
• Check whether you would be a limited cost trader in most VAT periods -- if yes, FRS is almost certainly not worth it.
• If you are already on FRS, review whether it is still saving you money or quietly costing you.
• If you decide to leave FRS, do it properly through HMRC so you do not end up on the wrong scheme.

Sources and legislation

• Value Added Tax Act 1994 -- section 26B, legal basis for the Flat Rate Scheme. legislation.gov.uk/ukpga/1994/23
• Finance Act (various) -- limited cost trader rules and FRS amendments. legislation.gov.uk/ukpga
• VAT Notice 733 -- HMRC guidance on the Flat Rate Scheme for small businesses. gov.uk/government/publications/vat-notice-733-flat-rate-scheme-for-small-businesses

Related guides on this site

• 5.4 VAT registration
• 5.5 VAT reverse charge for construction
• 5.16 VAT for builders
• 1.7 Reverse charge VAT
• 5.3 Filing Self Assessment -- construction-specific deductions
• 14.10 Cashflow and pricing

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