VAT Flat Rate Scheme 2026/27: how it works and who it suits

The VAT Flat Rate Scheme (FRS) is an optional simplification for small VAT-registered businesses. Instead of working out output VAT minus input VAT each quarter, you pay HMRC a single percentage of your gross takings. For the right business it saves admin and a little money. For the wrong one, particularly a service business that buys almost no goods, it costs more than normal VAT accounting.

How the Flat Rate Scheme works

Under normal VAT accounting you charge VAT on your sales, reclaim VAT on your purchases and pay HMRC the difference. Under the Flat Rate Scheme:

• you still charge your customers VAT at the normal rate (usually 20%) and issue normal VAT invoices
• you pay HMRC a fixed percentage of your VAT-inclusive turnover for the period
• you keep the difference between the VAT you charged and the flat rate amount
• you generally cannot reclaim the VAT you pay on purchases

The percentage depends on the trade sector your business falls into. HMRC set the rates to reflect the typical level of input VAT in each sector, so the scheme is roughly neutral for an average business in that sector. You gain if your real input VAT is below the sector average, and lose if it is above.

Who can join

You can apply to join if you are VAT-registered and you expect your VAT taxable turnover in the next 12 months to be £150,000 or less, excluding VAT. Sole traders, partnerships and limited companies can all use it.

You cannot join if any of these apply:

• you left the scheme in the last 12 months
• you committed a VAT offence, such as VAT evasion, in the last 12 months
• you joined, or were eligible to join, a VAT group in the last 24 months
• you registered for VAT as a business division in the last 24 months
• your business is closely associated with another business
• you use a margin scheme or the capital goods scheme

The FRS cannot be combined with the separate Cash Accounting Scheme, but it has its own cash-based turnover method, so you can still account for VAT when customers pay you. It can be combined with the Annual Accounting Scheme.

Flat rate percentages by sector

You use the percentage for your main business activity, measured by turnover. If you work in two sectors you do not split your income; you pick the sector that brings in the larger share. A selection of the sector rates:

HMRC publishes the full list of sectors in VAT Notice 733 and on GOV.UK. Building work counts as labour-only when materials are less than 10% of the turnover from that work.

The first-year discount

If you are in your first year of VAT registration you can reduce your flat rate by one percentage point. An accountant who registers and joins the scheme at the same time would use 13.5% rather than 14.5% until the day before the first anniversary of registration. The discount also applies to the 16.5% limited cost rate.

The limited cost business rate

Since April 2017, businesses that spend very little on goods must use a flat rate of 16.5%, whatever their sector. You are a limited cost business for a VAT period if the VAT-inclusive amount you spend on relevant goods is either:

• less than 2% of your VAT-inclusive flat rate turnover, or
• more than 2% but less than £1,000 a year (£250 a quarter, pro rata for other period lengths)

You check this every VAT period, so a business can move between the sector rate and 16.5% from one return to the next.

“Relevant goods” are goods used only for the business. They do not include services (rent, software subscriptions, phone contracts, insurance, accountancy fees), capital expenditure goods, food and drink for you or your staff, vehicles, vehicle parts and fuel (unless you run a transport business), or goods you resell or hire out unless that is your main business. In practice most consultants, contractors and other service businesses that mainly buy services fail the test.

16.5% of a VAT-inclusive figure is 19.8% of the net sale, so a limited cost business pays HMRC almost all of the VAT it charges and gets nothing back for its costs. For most of these businesses normal VAT accounting is cheaper.

Worked examples

Both examples assume a quarter in which the business invoices £15,000 plus VAT, so VAT-inclusive turnover is £18,000 and output VAT is £3,000.

A management consultant who buys mainly services

The consultant’s costs are software, a phone contract and an accountant, with £400 of VAT on them, and only £120 of goods in the quarter. £120 is less than 2% of £18,000 (£360), so the consultant is a limited cost business.

The scheme costs the consultant £370 a quarter compared with normal accounting.

A hairdresser who buys products for the salon

The salon buys £1,500 (including VAT) of shampoos, colours and other products in the quarter, which is more than 2% of turnover, so it uses the sector rate of 13%. Its total input VAT under normal accounting would be £450.

Here the scheme saves £210 a quarter and the salon no longer needs to track VAT on every purchase. The saving depends entirely on the real level of input VAT, so run the numbers for your own business before you apply. Our flat rate VAT calculator does the comparison for you.

What counts as flat rate turnover

The percentage applies to your total VAT-inclusive turnover for the period. That includes:

• standard-rated sales, including the VAT you charged
• zero-rated and reduced-rate sales
• exempt income, such as rent

Because exempt and zero-rated income is included, a business with a lot of either can pay more on the scheme than it would otherwise. On the scheme you are treated as fully taxable, so you do not need partial exemption calculations, but the exempt income still goes into the figure you multiply. Sales of capital assets on which you reclaimed VAT are left out of flat rate turnover and dealt with separately.

Capital assets over £2,000

You can reclaim input VAT on a single purchase of capital expenditure goods costing more than £2,000 including VAT, such as a van, machinery or a high-spec computer bought in one transaction. You claim it on your VAT return outside the flat rate calculation. If you later sell an asset you reclaimed VAT on, you account for output VAT on the sale at the normal rate, outside the scheme. Services, however expensive, do not qualify.

Joining and leaving

If you are registering for VAT for the first time you can apply to join the scheme on the registration application. If you are already registered, apply online or with form VAT600FRS. HMRC confirms in writing the date your use of the scheme starts.

You must leave the scheme if:

• on the anniversary of joining, your VAT-inclusive turnover for the previous 12 months was more than £230,000, or you expect it to be over £230,000 in the next 12 months
• you expect your total income in the next 30 days alone to exceed £230,000 including VAT
• you stop being eligible for any other reason

You can also leave voluntarily at any time by writing to HMRC. Once you leave you cannot rejoin for 12 months, so leaving because one quarter looked expensive is rarely a good idea.

Is the Flat Rate Scheme worth it?

The scheme tends to suit:

• businesses with low input VAT that still spend more than 2% of turnover on goods, such as salons, cafés, some retailers and trades that buy materials
• businesses that sell mainly to consumers, who cannot reclaim the VAT anyway
• owners who value simpler records and are happy with a modest saving

It tends not to suit:

• limited cost businesses, which covers most consultants and contractors
• businesses with high VAT costs, which lose the right to reclaim them
• businesses with significant exempt or zero-rated income
• businesses that expect to make VAT repayment claims, such as exporters

Remember that the scheme does not change your VAT registration obligations or Making Tax Digital for VAT. You still keep digital records and file returns through compatible software.

Frequently asked questions

Do I still charge my customers 20% VAT on the Flat Rate Scheme?

Yes. Your invoices show VAT at the normal rate for the goods or services you supply. The flat rate only changes how much of that VAT you pass to HMRC.

Can a limited company use the Flat Rate Scheme?

Yes. The scheme is open to any VAT-registered business that meets the turnover limit and is not excluded, whether it is a sole trader, partnership or limited company.

Can I reclaim VAT on a laptop on the Flat Rate Scheme?

Only if it is a capital purchase costing more than £2,000 including VAT in a single transaction. VAT on a cheaper laptop, and on all services, cannot be reclaimed while you are on the scheme.

How often do I check whether I am a limited cost business?

Every VAT return period. Compare the VAT-inclusive cost of relevant goods for the period with 2% of your flat rate turnover and with the pro-rata £1,000 annual figure. If you fail either test, use 16.5% for that period.

What happens to the first-year discount if I join part way through my first year?

The 1% reduction runs from your effective date of VAT registration to the day before its first anniversary, so a business that joins later in its first year only gets the discount for the rest of that year.

Can I use the Flat Rate Scheme with the Annual Accounting Scheme?

Yes. Many small businesses use both, filing one VAT return a year and paying a flat rate. You apply for each scheme separately unless you join both when you first register.