What is the Flat Rate VAT Scheme? A 2026 Guide
Through the VAT Flat Rate Scheme, a business pays a fixed percentage of its turnover to HM Revenue and Customs, rather than paying the total VAT it collected minus the total VAT it paid, which is the standard VAT calculation method. You still charge your customers the normal 20% VAT. What changes is how much of it you hand over.
Businesses with a yearly turnover of £150,000 or less are eligible to register with HM Revenue and Customs through the Flat Rate Scheme. If a business is already on the flat rate VAT scheme but its turnover passes £230,000 a year including VAT, it is no longer eligible for the scheme. After registering, the business pays its VAT to HMRC every three months, which saves much of the effort of accountancy and the worry of a receipt being misplaced.
Who can use the Flat Rate Scheme?
Joining the Flat Rate Scheme is straightforward for many small businesses, but there are some conditions to meet. To qualify, a business must already be VAT registered and expect its VAT taxable turnover for the next 12 months to be £150,000 or less, not including VAT. It also must not have left the scheme in the previous 12 months, and must not have committed a VAT offence, such as tax evasion, in the previous 24 months.
In addition, the business cannot be part of a VAT group or use certain other VAT schemes, such as the VAT Margin Scheme or the Cash Accounting Scheme. Finally, the business must not be closely linked with another company in a way that could artificially reduce its turnover to stay under the entry limit.
How much will a business pay under the Flat Rate Scheme?
Under the Flat Rate Scheme you still charge your customers the normal 20% VAT. Rather than adding up the VAT on every sale and taking off the VAT on every purchase, you pay HMRC a single flat percentage of your gross turnover, which is your sales plus the VAT you charged. You keep the difference between the two, and that gap is why the scheme leaves some businesses better off.
Working it out is easy. Suppose your VAT inclusive turnover for the year is £108,000 and your flat rate is 10%. You simply multiply the percentage by the turnover.
So you would pay £10,800 to HMRC for the year. You can work any figure out in seconds with our free VAT calculator.
To see the margin on a single job, imagine you invoice a customer £1,000 and add £200 of VAT, so they pay £1,200. If your flat rate is 10% you pay £120 to HMRC and keep the other £80. That £80 stands in for the VAT you would otherwise reclaim on your costs, which is why the scheme works best for businesses that buy very little.
A practical benefit is that you do not have to work out the VAT on each individual purchase, since those figures are not used in the flat rate sum. You still keep your normal VAT records and file under Making Tax Digital. Also, if you are within your first year of VAT registration, you take 1% off your flat rate. For example, if your trade rate is 11%, you pay 10% in the first year.
How much do limited cost businesses pay?
Since April 2017, a special rule applies to limited cost businesses. A business falls into this category if the cost of its goods, known as relevant goods, is less than 2% of its VAT inclusive turnover, or less than £1,000 a year. If classified as a limited cost business, the flat rate is set at 16.5% whatever the business sector. This rule stops service based businesses with very low goods costs from gaining an unfair advantage under the scheme.
Not all purchases count as relevant goods. Excluded items include:
- vehicles, fuel and related costs
- capital expenditure, such as large equipment purchases
- food and drink for staff
- services, such as accountancy, legal advice or rent
What do other business types pay?
The flat rate you use depends on your trade. The rates run from 4% up to 14.5%, with limited cost businesses paying 16.5%. The most common sectors are shown below.
| Business type | Flat rate | Explanation |
|---|---|---|
| Accountants and bookkeepers | 14.5% | Used by firms that handle financial records, tax returns or general bookkeeping work. |
| Advertising and marketing services | 11% | Applies to businesses offering advertising, promotions and marketing consultancy. |
| Architects and engineers | 14.5% | For those designing buildings and structures, or offering technical engineering and surveying services. |
| Bakers and food retailers | 4% | For shops selling baked goods, sweets, newspapers, tobacco or children’s clothing. |
| General building and construction (materials 10% or more) | 9.5% | For builders and contractors who supply materials that make up at least 10% of their turnover. |
| Construction (labour only, materials under 10%) | 14.5% | For builders who mainly supply labour rather than materials. |
| Cafés, restaurants and takeaways | 12.5% | Used by catering services or food businesses selling meals to the public. |
| IT consultants and computer services | 14.5% | For technology and computer professionals providing advice, software or data services. |
| Hairdressers and beauty salons | 13% | For personal care services such as haircuts, styling and beauty treatments. |
| Hotels and accommodation | 10.5% | For hotels, guesthouses or any business providing short term accommodation. |
| Lawyers and legal services | 14.5% | For solicitors, barristers and other professionals offering legal advice or services. |
| Estate agents and property managers | 12% | For those involved in selling, renting or managing properties. |
| Vehicle repair and maintenance | 8.5% | For garages and mechanics repairing or servicing motor vehicles. |
| Transport, couriers and delivery services | 10% | For businesses offering deliveries, removals, freight or taxi services. |
| Pubs | 6.5% | For public houses and bars serving drinks and food on the premises. |
| Other businesses not listed elsewhere | 12% | For any business activity not clearly falling under another category. |
HMRC publishes the full list of sector rates, so it is worth checking the exact figure for your trade before you join. A few points to keep in mind:
- The flat rate percentages are worked out on your total sales including VAT, not just the net value of your turnover.
- During your first 12 months of VAT registration, you can take 1 percentage point off your flat rate.
- If HMRC classes you as a limited cost business, you do not use the sector rate, and instead apply a flat rate of 16.5%.
- When your business does more than one type of activity, choose the category that reflects where the majority of your income comes from.
Can you reclaim VAT on the Flat Rate Scheme?
For the most part, no. The flat rate already allows for an average amount of VAT on your costs, so you do not reclaim VAT on your purchases in the normal way. There is one useful exception. You can reclaim the VAT on a single purchase of capital goods, such as equipment or machinery, where the amount including VAT is £2,000 or more. If you later sell an asset that you reclaimed VAT on, you charge VAT on that sale at 20% rather than at your flat rate.
Is the Flat Rate Scheme worth joining?
The scheme suits some businesses and costs others money, so it pays to compare before you join. It tends to work best for service businesses with low costs, such as consultants, agencies and trades that mainly sell their time, and for owners who value simple records and a predictable VAT bill. It tends to work poorly for businesses with high VAT bearing costs, a lot of zero rated or exempt sales, or those that fall into the limited cost band and pay 16.5%.
| Reasons it can help | Reasons to be careful |
|---|---|
| Simpler records and quicker VAT returns | You cannot reclaim VAT on most purchases |
| A single fixed percentage to pay | The 16.5% limited cost rate can wipe out the benefit |
| A chance to keep a margin on the flat rate | Exempt and zero rated sales still count towards it |
| A 1% discount in your first year | You must watch the £230,000 limit and may have to leave |
How to apply for the Flat Rate Scheme
If you are not yet VAT registered, you can apply for VAT registration and the Flat Rate Scheme at the same time. If you are already VAT registered, you can join by applying through your VAT online account or by completing and submitting the VAT600FRS form to HMRC. Once accepted, HMRC will confirm the date from which you should start using the scheme. You must also keep proper records of your flat rate calculations alongside your normal VAT records.
How to leave the Flat Rate Scheme
You can leave the scheme at any time by writing to HMRC, and you must leave once your turnover passes the £230,000 limit. HMRC confirms the date you move back to standard VAT accounting. Once you have left, you have to wait 12 months before you can rejoin, so it is worth being sure before you switch.
Working out your flat rate figures? Add or remove VAT at 20%, 5%, 0% or any custom rate in seconds and copy the full breakdown with our free tool.
Use the free VAT calculatorFrequently asked questions
It is a simpler way to work out VAT. You still charge customers 20%, but instead of adding up the VAT on every sale and purchase you pay HMRC a fixed percentage of your gross turnover and keep the difference.
Any VAT registered business that expects its VAT taxable turnover for the next 12 months to be £150,000 or less, excluding VAT. You must leave once your turnover passes £230,000 including VAT.
You multiply your flat rate by your VAT inclusive turnover. If your turnover is £108,000 and your flat rate is 10%, you pay £10,800 to HMRC. The percentage always applies to your gross sales, including the 20% VAT you charged.
You are a limited cost business if your goods cost less than 2% of your VAT inclusive turnover, or less than £1,000 a year. If so, you pay a flat rate of 16.5% whatever your sector. The rule stops low cost service businesses gaining too much from the scheme.
Usually no, because the flat rate already allows for the VAT on your costs. The one exception is a single purchase of capital goods worth £2,000 or more including VAT, where you can reclaim the VAT in the normal way.
It depends on your costs. Low cost service businesses and those wanting simpler records often gain, while businesses with high VAT on their purchases, lots of zero rated or exempt sales, or a 16.5% limited cost rate can be better off on standard VAT.
Join through your VAT online account or by sending form VAT600FRS to HMRC. To leave, write to HMRC, and you must leave once your turnover passes £230,000. After leaving you wait 12 months before you can rejoin.