Flat rate or standard VAT?

How the flat rate actually works

You still charge customers 20% on top of your prices. Instead of handing HMRC the VAT you collected minus the VAT on your receipts, you hand over your sector's percentage of your VAT-inclusive turnover and keep no reclaim. On £60,000 of sales at the 14.5% labour-only rate, that's 14.5% of £72,000 — £10,440 — against the £11,000 a standard return with £6,000 of materials would owe. Less paperwork, and on those numbers £560 cheaper.

The 16.5% trap

Spend under 2% of turnover (or under £1,000 a year) on physical goods and you count as a limited cost trader: your sector rate is replaced by 16.5%. On VAT-inclusive turnover that's 19.8% of your net prices — nearly everything you collected, with nothing back on costs. Labour-heavy trades hit this without noticing, because vans, fuel, phone bills and subcontractors don't count as goods. The same £60,000 year with £800 of materials owes £11,880 on the flat rate and £11,867 on standard — the simplification now costs money.

Picking a side

Materials-heavy years favour the standard scheme, because the reclaim is real money. Labour-heavy years often trip the limited-cost test, which decides the question for you. Run both your last year and the year you expect — you join or leave the scheme with HMRC, so it's a decision worth making on numbers, with your accountant if you have one.