VAT for Trades: Flat Rate vs Standard in 10 Minutes

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If you’re running a trade in the UK and you’ve just crossed the VAT registration threshold, you’ll have a key decision to make: go for the Flat Rate Scheme or stick with Standard VAT accounting. Get this right and you’ll save yourself thousands in unnecessary taxes and hours of paperwork. Get it wrong and you’ll be handing the taxman more than you need to.

Let’s break down exactly how each one works, what the actual percentages are for your trade, and how to figure out which one saves you the most money.

When Do You Need to Register for VAT?

First things first: you’ve got to register for VAT once your turnover hits £90,000 in any 12-month period. Some trades hit this quicker than others, especially if you’re doing commercial work. Once you’ve registered, you’ll need to decide which scheme works best for you within the next month or so.

The Flat Rate Scheme: The Simple Option

The Flat Rate Scheme is exactly what it says on the tin. You pay HMRC a fixed percentage of your turnover as VAT, and you don’t claim back VAT on what you spend. That means your paperwork is simpler, your quarterly returns are quicker, and you know exactly what you’ll owe.

Here’s the important bit: the percentage varies by trade sector. Here are the rates for common trades:

Electricians: 14.5%
Plumbers: 14.5%
General building: 9.5%
Gas installation: 14.5%
Groundwork and excavation: 9.5%
Carpenters and joiners: 9.5%

But here’s a bonus: if you’ve just registered, you get a 1% discount for your first year. So an electrician would pay 13.5% instead of 14.5% in that first year. That’s a decent saving right off the bat.

There’s a turnover limit as well: you can only stay on the Flat Rate Scheme if your turnover doesn’t exceed £150,000 in any one year. Once you hit that, you’re back to Standard VAT.

The Limited Cost Trader Rule: A Catch

Here’s where it gets a bit trickier. If you’re a limited cost trader, HMRC charges you 16.5% instead of your normal flat rate. You’re classed as a limited cost trader if you spend less than 2% of your turnover on goods, or less than £1,000 per year on goods—whichever is lower.

So if you’re making £100,000 and you’re only buying £1,500 worth of materials and supplies, you’ll hit that threshold. In that situation, Standard VAT might actually be your friend.

Standard VAT Accounting: More Admin, Potentially More Money

With Standard VAT, you charge your customers 20% VAT on everything you invoice. But here’s the payoff: you claim back the VAT you’ve paid on your business purchases. Your quarterly return then shows the difference, and you either pay that to HMRC or they owe you money.

This is brilliant if you’ve got high material costs. Think about it: you’re claiming back 20% on every invoice for materials, equipment, vans, tools, and even fuel. On a big refurb job where materials are 40% of your turnover, that’s significant money you’re getting back.

The downside? The admin is more involved. You need to keep every invoice, record everything properly, and do quarterly VAT returns. But if you’re using software like Xero or QuickBooks, it’s honestly not that painful once you’re set up.

Worked Example: See the Difference

Let’s say you’re a plumber with £120,000 turnover. Your material costs are around £35,000 a year.

Flat Rate Option:

VAT due: £120,000 × 14.5% = £17,400 per year (or £13,200 in year one with the discount)

Standard VAT Option:

VAT charged to customers: £120,000 × 20% = £24,000
VAT on materials: £35,000 × 20% = £7,000
VAT to pay HMRC: £24,000 - £7,000 = £17,000 per year

In this example, Standard VAT saves you £400 a year. Not massive, but it’s there.

Now imagine you’re the same plumber but you buy a van for £30,000:

Flat Rate Option:

VAT due: £120,000 × 14.5% = £17,400 (the van doesn’t change this)

Standard VAT Option:

VAT charged to customers: £24,000
VAT on materials and purchases: £7,000 + (£30,000 × 20%) = £13,000
VAT to pay HMRC: £24,000 - £13,000 = £11,000 per year

Suddenly Standard VAT is saving you £6,400 that year. That’s the kind of difference a big purchase can make.

Which Scheme Suits Your Trade?

Ask yourself these questions:

Do you buy a lot of materials? If materials are more than 20-25% of your turnover, Standard VAT likely wins.
Are you planning a big purchase soon—new van, equipment, scaffolding? Standard VAT will save you money.
Do you want to keep your accounting simple? Flat Rate wins every time.
Are you a limited cost trader? Check HMRC’s definition carefully—you might not even have the choice.

For most trades, the Flat Rate Scheme is the sweet spot. You’ll save time and money on accounting, and unless your materials costs are really high, you won’t lose out financially.

How to Set It Up: Xero and QuickBooks

In Xero: Go to Settings > Tax. Select “Flat Rate Scheme” from the dropdown. Enter your flat rate percentage—Xero will give you options based on your trade category. Once you’ve set it up, every invoice you create will automatically calculate VAT at that rate. Your quarterly returns basically become a two-minute job.

In QuickBooks: Head to Settings > Tax settings. Choose “Flat Rate Scheme” and enter your trade’s percentage. When you create invoices, you’ll select the flat rate tax code instead of the standard 20% code. QuickBooks will track this separately on your VAT returns, making it easy to see what you owe.

If you’re switching to Standard VAT from Flat Rate (or vice versa), both systems let you change your tax settings. Just note that you can usually only make one change per year unless HMRC approves something different.

Switching Between Schemes

You can switch once per year, either from Flat Rate to Standard or the other way around. If you want to make a change, you need to notify HMRC in writing—or nowadays, you can do it through your account online. It usually takes effect from the start of your next VAT period.

Some trades switch depending on the year. If you’ve got a big materials project coming up, you might switch to Standard. Once it’s done, you switch back to Flat Rate for the admin saving.

The Bottom Line

For most trades—builders, electricians, plumbers—the Flat Rate Scheme is your best friend. It’s simpler, faster, and for normal levels of material spending, it’ll save you money compared to the admin overhead of Standard VAT.

But if you’re a specialist with high material costs, or if you’re buying expensive equipment, run the numbers. Standard VAT might actually put money back in your pocket. And remember, you can switch if your circumstances change.

Get your accountant or bookkeeper to do a quick calculation with your actual numbers. Ten minutes of work now could save you thousands over the next few years.

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