On the standard scheme you charge VAT, reclaim the VAT on your purchases, and pay HMRC the difference. On the flat rate scheme you still charge VAT at the normal rate, but you pay HMRC a fixed percentage of your gross turnover and give up most of your input VAT reclaims.

That trade only makes sense if your input VAT is small. If box 4 on your returns is close to empty quarter after quarter, you are giving up very little in exchange for a lower payment. If you buy materials, subcontract work, or run a van fleet, you are giving up a lot.

The percentages are set by trade sector. Computer and IT consultancy sits at 14.5%, management consultancy at 14%, business services not listed elsewhere at 12%, estate agency and property management at 12%. Those are percentages of your VAT-inclusive turnover, which is why comparing them to 20% in your head gives you the wrong answer. A 14.5% flat rate on gross income is a meaningfully bigger slice than 14.5% of your net sales.

So the question is never whether the percentage looks low. It is whether the percentage beats what you would otherwise reclaim.

This is the rule that changed the arithmetic in April 2017 and the one most owners have never had explained to them.

If your spending on goods comes to less than 2% of your gross turnover, or less than £1,000 a year, you are a limited cost trader and you must use a flat rate of 16.5% regardless of your sector percentage. The test looks at goods only. Services do not count, and neither do capital items, motor expenses, or food and drink consumed by the business.

For a labour-only contractor with a laptop, a phone contract, and some software subscriptions, that test is usually failed. Software bought as a download or a subscription is a service. Your accountancy fees are a service. Your professional insurance is a service. You can have thousands of pounds of genuine business costs and still spend nothing on goods.

At 16.5% of gross turnover you are handing over close to the full VAT you charged, with almost nothing back for your purchases. At that point the scheme is a cost, not a saving.

The test is applied period by period, so a business can drift in and out of limited cost trader status as its spending changes. That is exactly the sort of thing nobody notices until a year has gone by.

The winners have a specific profile. High invoice values, low transaction volume, and costs that are either services from abroad or not VAT-bearing at all.

One of ours is a procurement consultant running a limited company. During his set-up review I pulled his last four VAT returns and box 4 was almost empty every quarter. His main costs were overseas software and reverse-charge services, so he had very little UK input VAT to reclaim in the first place. He also had enough goods spending to stay clear of the limited cost trader test. We moved him from standard to flat rate and his VAT bill came down every quarter, with no change to what he invoiced.

That is the shape to look for:

• Input VAT that is genuinely small, not just small in your head
• Goods spending safely above 2% of gross turnover, with room to spare
• A sector percentage below the effective rate you are currently paying over
• Stable turnover, so you are not about to cross the scheme’s exit threshold

Miss any one of those and the answer flips. The construction and trades companies we work with are almost always better off on standard, because their materials carry real VAT and reclaiming it matters more than any rate saving.

You do not need software to do a first pass. Take your last four VAT returns and write down two figures for each quarter: box 6, your total sales excluding VAT, and box 4, the VAT you reclaimed.

Then work out what you actually paid over as a share of your VAT-inclusive turnover. Compare that with your sector flat rate percentage, or with 16.5% if you think the limited cost trader test catches you. If flat rate looks lower across all four quarters, it is worth a proper look. If it wins in one quarter and loses in three, leave it alone.

Two things to be careful with. First, seasonality. A business with a quiet quarter and a heavy spending quarter can get a misleading answer from a single return. Second, capital purchases. There are limited circumstances where you can reclaim VAT on capital assets while on the flat rate scheme, and if you are planning a significant purchase that changes the sum entirely.

HMRC runs recorded webinars on the flat rate scheme, including how it works and when capital expenditure can be reclaimed. They are worth an hour if you want the mechanics from the source.

Here is the uncomfortable part. Most owners on the flat rate scheme joined it years ago, on the advice of somebody who has since left the firm, and nothing has been reviewed since.

VAT scheme selection is a once-a-year, ten-minute job for an accountant who has your returns in front of them. It gets skipped because it is advisory work, and in a lot of practices advisory work is either billed separately or quietly dropped when the compliance deadlines pile up. The account manager who files your return has no brief to ask whether the scheme is still the right one.

That is why a scheme check is part of the set-up review for every new client here. I look at your structure, your VAT scheme, your salary and dividend position, and your software, and I tell you why each is right or what should change. Sometimes the answer is that nothing needs changing, and that is a useful answer too.

Nexus takes three new clients a month, which is what makes it possible to actually do that work rather than promise it.