You've crossed the VAT threshold, you're now charging 20% on every UK sale, and someone in a seller group has told you the Flat Rate Scheme will "save you a fortune". For most Amazon FBA businesses, that advice is years out of date.
This guide explains exactly when the Flat Rate Scheme (FRS) helps an FBA seller and when it quietly costs you money. We'll cover the rates, the 16.5% limited cost trap that catches most sellers, the zero-rated export problem, and a worked example with current figures so you can see the maths for your own numbers.
It's written for UK-established sellers running Amazon FBA, whether you're private label, wholesale, or arbitrage.
Quick answer: is the Flat Rate Scheme worth it for FBA sellers?
For most Amazon FBA sellers, no. The Flat Rate Scheme stops you reclaiming the VAT on stock, Amazon fees and ads, and the "limited cost business" rule pushes many sellers onto a punishing 16.5% rate. It can still suit a lean, low-cost seller, but you have to run the numbers first.
How does the VAT Flat Rate Scheme actually work?
Under normal "standard" VAT accounting, you charge 20% output VAT on your sales, reclaim the input VAT on your costs, and pay HMRC the difference.
The Flat Rate Scheme replaces that. Instead of tracking input VAT, you apply a single fixed percentage to your gross, VAT-inclusive turnover, and that's what you pay over. You still charge customers 20% as normal, but you keep the difference between the 20% you collected and the lower flat rate you hand to HMRC.
The trade-off is the catch: under FRS you generally cannot reclaim the VAT on your purchases, except for certain capital assets costing more than £2,000 including VAT (VAT Notice 733).
A few rules frame the whole decision:
- You can join if your taxable turnover excluding VAT for the next 12 months will be £150,000 or less.
- You must leave once your total VAT-inclusive income for the year then ending is more than £230,000, and you must leave immediately if you expect to exceed £230,000 in the next 30 days alone.
- You get a 1% discount on your flat rate in your first year as a VAT-registered business.
All three points come straight from VAT Notice 733. The £150,000 entry limit alone rules out a lot of established FBA businesses, because once your stock is moving on Amazon you tend to pass it quickly.
What is the limited cost business trap?
This is the rule that quietly killed FRS for most online sellers, and it's the first thing to check.
Since April 2017, HMRC applies a "limited cost business" test. You're a limited cost business if the amount you spend on relevant goods, including VAT, is either:
- less than 2% of your flat rate turnover, or
- more than 2% but less than £1,000 a year (£250 for a quarterly return).
If you fall into that bracket, your flat rate is 16.5% regardless of your sector (VAT Notice 733). On VAT-inclusive turnover, 16.5% works out at roughly 19.8% of your net sales, so you're handing over almost all the VAT you collected and reclaiming none of it. That is almost always worse than standard accounting.
The sting is in what counts as "relevant goods". The test only looks at goods, and it specifically excludes:
- capital expenditure goods,
- food and drink for you or your staff,
- vehicles, vehicle parts and fuel (unless you're in the transport business), and
- any services.
Here's why that matters for FBA. Your Amazon selling fees, FBA fulfilment fees, storage fees and PPC advertising are all services, not goods. They don't count towards the relevant goods test at all. So a seller whose main spend is Amazon fees and ads, with relatively little spent on physical stock, can easily be classed as a limited cost business and forced onto 16.5%.
A genuine private-label or wholesale seller buying plenty of stock will usually pass the test and keep their sector rate. A light-stock arbitrage flipper, a print-on-demand seller, or anyone whose costs are mostly platform fees, may not.
Why FBA input VAT is the dealbreaker
Even if you pass the limited cost test and qualify for a low sector rate, the Flat Rate Scheme blocks you from reclaiming input VAT, and FBA sellers carry a lot of it.
Three big buckets of VAT-bearing cost sit in a typical FBA business:
- Stock. If you buy from UK suppliers you pay 20% VAT on stock. If you import, you pay import VAT at the border. Under standard accounting that's all reclaimable.
- Amazon fees. Where your fees are invoiced by Amazon EU S.a.r.l., which has a UK branch, they're treated as a normal UK B2B supply of services with UK VAT on them, reclaimable under standard accounting (VAT Notice 741A). That VAT can run into thousands of pounds a year.
- Advertising and overheads. PPC, software, prep services and professional fees almost all carry recoverable VAT.
Under FRS you wave goodbye to all of that. For a business spending heavily on fees and stock, the input VAT you give up usually dwarfs the margin the flat rate hands back.
This is the opposite of a consultant or contractor with almost no costs, who is exactly the kind of business FRS was originally designed to help.
Do zero-rated exports count towards your flat rate turnover?
Yes, and this is a nasty one for FBA sellers using Amazon's pan-European or export programmes.
Your "flat rate turnover" includes the VAT-inclusive value of all the supplies your business makes, including zero-rated and exempt sales (VAT Notice 733). So sales that carried no output VAT, such as zero-rated exports of goods, still get pulled into the figure you apply your flat rate to.
In plain terms: you collected nothing extra on those export sales, but you still pay your flat rate percentage on them. If a meaningful share of your sales are zero-rated exports, FRS can turn profitable sales into a VAT cost. Under standard accounting, by contrast, zero-rated sales carry no output VAT and you still reclaim the input VAT on the related costs.
It's also worth knowing where you sit in the marketplace VAT rules, because it changes who accounts for the VAT in the first place. Where an overseas seller's goods are already in the UK, or where goods outside the UK are sold in consignments of £135 or less, the online marketplace is the deemed supplier and accounts for the VAT (VAT and overseas goods sold using online marketplaces). A UK-established seller selling their own UK stock accounts for VAT in the normal way, which is the situation this guide assumes.
Worked example: standard VAT vs the Flat Rate Scheme
Illustrative example. Maya runs a UK-established private-label FBA business. Her figures for a full year in 2025/26 are below. All sales are standard-rated UK sales. Her sector flat rate is 7.5% (retailing not listed elsewhere); she's past her first VAT year, so no 1% discount applies.
| Item | Net | VAT (20%) | Gross |
|---|---|---|---|
| Sales | £100,000 | £20,000 | £120,000 |
| Stock (UK suppliers) | £30,000 | £6,000 | £36,000 |
| Amazon fees (UK VAT) | £18,000 | £3,600 | £21,600 |
| PPC and overheads | £5,000 | £1,000 | £6,000 |
First, the limited cost test. Maya's relevant goods are her stock, £36,000 including VAT. That's well above both 2% of her £120,000 flat rate turnover (£2,400) and the £1,000 floor, so she is not a limited cost business and keeps her 7.5% sector rate.
Standard VAT accounting
- Output VAT on sales: £20,000
- Input VAT reclaimed: £6,000 + £3,600 + £1,000 = £10,600
- VAT due to HMRC: £20,000 − £10,600 = £9,400
Flat Rate Scheme at 7.5%
- Flat rate turnover (gross sales): £120,000
- VAT due to HMRC: £120,000 × 7.5% = £9,000
On these numbers FRS saves Maya £400 a year. Real, but slim, and it ignores the extra admin of monitoring the limited cost test every quarter.
Now change one thing. Suppose Maya scales her ad spend and her stock buying tightens, so her relevant goods for a quarter dip below £250. For that quarter she becomes a limited cost business at 16.5%:
- Flat rate turnover for the quarter (gross sales): £30,000
- VAT due: £30,000 × 16.5% = £4,950, versus roughly £2,350 under standard accounting on the same quarter.
That single quarter wipes out a whole year of the 7.5% saving and then some. This is why FRS is so fragile for FBA: you can flip into the 16.5% band without realising, and the downside is far bigger than the upside.
When might the Flat Rate Scheme still suit an FBA seller?
It isn't never. FRS can still work where:
- Your costs are genuinely low and you reliably pass the limited cost test on your sector rate, not 16.5%.
- Your input VAT is small relative to turnover, so you're not giving up much by not reclaiming.
- Nearly all your sales are standard-rated UK sales, with little or no zero-rated export volume inflating your flat rate turnover.
- You're in your first VAT year and the 1% discount tips a borderline case in your favour.
- You value simpler bookkeeping enough to accept a marginal result.
Even then, the gain is usually small and the scheme needs reviewing every year, because growth past £230,000 forces you out and a quiet quarter can drop you into 16.5%.
If you're a heavier-spending or exporting seller, the maths almost always favours standard accounting. We go into the wider picture for sellers on our accounting for Amazon FBA sellers page.
A simple decision walkthrough
Work through these in order before joining or staying on FRS:
- Is your taxable turnover £150,000 or under (ex VAT) for the next year? If no, you can't join.
- Do you pass the limited cost test on your sector rate? Add up relevant goods, including VAT, and exclude services, capital items, food and fuel. If you're below 2% of flat rate turnover, or below £1,000 a year, you're stuck at 16.5%, and FRS is almost certainly worse. Stop here.
- How much input VAT do you reclaim each year on stock, fees and ads? The bigger it is, the more FRS costs you.
- What share of sales are zero-rated exports? A high share counts against FRS, because you pay the flat rate on income that carried no VAT.
- Run both calculations on your real figures, the way we did above, for a full year. Only join if FRS clearly wins after the admin.
Whatever you choose, you'll be filing under Making Tax Digital for VAT, which is mandatory for all VAT-registered businesses, so your records need to be in compatible software either way. If you'd rather not run these numbers yourself, that's exactly the sort of review we handle for FBA clients through our VAT and tax advisory service.
Frequently asked questions
What flat rate percentage does an Amazon FBA seller use?
If you pass the limited cost business test, you use the rate for your trade sector, such as 7.5% for retailing not listed elsewhere. If you fail it, you must use 16.5% regardless of sector. Check your relevant goods spend each return period, because the answer can change.
Can I reclaim VAT on Amazon fees under the Flat Rate Scheme?
No. Under FRS you generally can't reclaim input VAT on your purchases, including Amazon selling, FBA and advertising fees, except for certain capital assets costing more than £2,000 including VAT. Under standard VAT accounting you can reclaim that VAT.
Why does the 16.5% rate catch so many online sellers?
The limited cost business test only counts spending on goods and excludes all services. Amazon fees, fulfilment, storage and PPC are services, so a seller whose main costs are platform fees rather than physical stock can fall below the goods threshold and be forced onto 16.5%.
Do zero-rated export sales count in my flat rate turnover?
Yes. Your flat rate turnover includes the VAT-inclusive value of all supplies, including zero-rated and exempt sales. You pay your flat rate percentage on export sales even though they carried no output VAT, which is a common reason FRS costs exporting FBA sellers money.
When do I have to leave the Flat Rate Scheme?
You must leave once your total VAT-inclusive income for the year then ending exceeds £230,000, and immediately if you have reason to believe your income in the next 30 days alone will exceed £230,000. Many growing FBA businesses cross this point.
Is the Flat Rate Scheme ever the right choice for FBA?
Occasionally, for a lean, low-cost, UK-only seller who reliably keeps their sector rate, has little input VAT to reclaim and few or no exports. For most FBA businesses with real stock, fees and ad spend, standard VAT accounting wins. Always run both calculations on your actual figures first.
Talk to an accountant who knows Amazon
Getting the VAT scheme right can be worth thousands a year, and getting it wrong is expensive and easy. If you'd like us to run the standard-versus-flat-rate comparison on your real Amazon numbers, book a free call with a Zmartly accountant and we'll tell you straight which scheme leaves you better off.
