In short: the VAT Flat Rate Scheme lets small UK businesses pay HMRC a fixed percentage of their VAT-inclusive turnover instead of recording VAT on every purchase. You still charge customers the normal 20% VAT, but you pay over a lower, trade-specific flat rate and keep the difference. You can join if your expected turnover is £150,000 or less excluding VAT.
How the Flat Rate Scheme actually works
With standard VAT accounting, you charge VAT on your sales (output tax) and reclaim VAT on your purchases (input tax), paying HMRC the difference each quarter. Under the Flat Rate Scheme the maths is simpler: you multiply your total VAT-inclusive turnover by your trade's flat rate percentage and pay that amount. You normally cannot reclaim input VAT on purchases — the flat rate is intended to cover it — except on a single capital purchase costing £2,000 or more including VAT.
Your invoices look completely normal: you charge 20%, 5% or 0% VAT as usual, and your customers see nothing different. The scheme only changes what happens between you and HMRC.
You pay HMRC = VAT-inclusive turnover × your flat rate %
Who can join (and who has to leave)
- Joining: your expected VAT-taxable turnover over the next 12 months must be £150,000 or less, excluding VAT. You can apply when you register for VAT or any time afterwards.
- Leaving: you must leave the scheme if your turnover at the anniversary review has passed £230,000 including VAT. You can also leave voluntarily at any time.
- Exclusions: you cannot use the scheme alongside the margin scheme for second-hand goods, the tour operators scheme, or the capital goods scheme, and it cannot be your first return if you were recently registered and using certain other schemes.
Flat rate percentages by trade (2026)
Your percentage depends on your main business activity. These are the most-used rates; the full list of 50+ categories is in VAT Notice 733 on GOV.UK.
| Trade or profession | Flat rate |
|---|---|
| Accountancy or bookkeeping | 14.5% |
| Advertising | 11% |
| Catering, restaurants and takeaways | 12.5% |
| Computer and IT consultancy | 14.5% |
| Entertainment or journalism | 12.5% |
| Estate agency and property management | 12% |
| General building or construction (labour and materials) | 9.5% |
| Labour-only building or construction services | 14.5% |
| Hairdressing and beauty | 13% |
| Hotel or accommodation | 10.5% |
| Legal services | 14.5% |
| Management consultancy | 14% |
| Photography | 11% |
| Retailing (any category not listed elsewhere) | 7.5% |
| Limited cost business (any trade) | 16.5% |
The 16.5% "limited cost business" rule
This is the rule that catches most people out. You are a limited cost business if the amount you spend on relevant goods is less than 2% of your VAT-inclusive turnover, or less than £1,000 a year. "Goods" means physical items like stationery or stock — services, software subscriptions, rent, food and drink, vehicle costs and capital items do not count. Limited cost businesses must use the 16.5% rate whatever their trade, which usually makes the scheme more expensive than standard VAT accounting. Most consultants, freelancers and IT contractors fall into this category, so run the test every VAT period.
Quick check: if your goods spending is under £1,000 a year (or under 2% of turnover), assume the 16.5% rate before joining — and re-check every quarter, because the test applies to each return period separately.
The 1% first-year discount
New to VAT? You get a further 1% off your flat rate for the first 12 months from the date of your VAT registration — not from when you joined the scheme. So an accountant on 14.5% pays 13.5% in their first VAT-registered year. If you join the scheme partway through that first year, you only get the discount for whatever time remains.
Worked example: consultant with £100,000 of sales
Meet Sam, an IT consultant with £100,000 net sales (all standard-rated), £1,400 a year of VAT-able goods, and £6,000 of services. Here is the honest comparison:
| Standard VAT | FRS @ 14.5% | FRS limited cost @ 16.5% | |
|---|---|---|---|
| VAT collected from customers (output tax) | £20,000 | £20,000 | £20,000 |
| VAT reclaimed on goods (input tax) | −£280 | — | — |
| Calculation | £20,000 − £280 | £120,000 × 14.5% | £120,000 × 16.5% |
| Paid to HMRC | £19,720 | £17,400 | £19,800 |
| Outcome vs standard | — | Saves £2,320 a year | Costs £80 more |
Sam spends £1,400 on goods, which is below 2% of the £120,000 VAT-inclusive turnover — so in reality Sam is a limited cost business and the scheme would cost money. This is exactly why you must run your own numbers before joining. Use our free VAT calculator to work out the VAT on your sales, then apply your flat rate percentage to the gross figure.
Pros and cons at a glance
Why join
- Simpler record-keeping — no tracking VAT on every purchase
- You keep the difference when your flat rate beats your cost mix
- 1% discount in your first year of VAT registration
- Predictable VAT bills help cash-flow planning
Why avoid
- The 16.5% limited cost rule wipes out the benefit for most service businesses
- You give up input VAT reclaims on everyday purchases
- The percentage applies to all turnover — including zero-rated and exempt sales
- You must leave (and wait a year to return) if you outgrow £230,000
How to join or leave
Apply through your VAT online account on GOV.UK (or by posting form VAT600FRS). HMRC will confirm your start date in writing — only apply the flat rate from that date, not before. To leave, notify HMRC the same way; you can leave voluntarily at any point, but you must leave if your anniversary turnover exceeds £230,000 including VAT.
⚡ Work out your VAT now — free UK VAT calculator Add or remove VAT at 20%, 5% or any custom rate. Instant, copy-ready results.Frequently asked questions
Is the VAT Flat Rate Scheme worth it?
It depends on your spending. If your trade's flat rate is low and you buy few VAT-able goods, you can keep thousands of pounds a year. Service businesses often fail the limited cost test and pay 16.5%, which usually makes the scheme more expensive than standard VAT accounting.
Do I still charge 20% VAT to customers on the Flat Rate Scheme?
Yes. You invoice customers at the normal VAT rate — 20%, 5% or 0% depending on the supply — and issue normal VAT invoices. The flat rate only changes how much VAT you pay over to HMRC, not what you charge.
Can I reclaim VAT on purchases on the Flat Rate Scheme?
Generally no. The flat rate is designed to replace input VAT reclaims. The one exception is a single purchase of capital assets costing £2,000 or more including VAT, which you can reclaim in the normal way.
What is the limited cost business rate?
16.5%. You are a limited cost business if your spending on relevant goods is less than 2% of your VAT-inclusive turnover, or less than £1,000 a year. Services do not count towards the test, so most consultants and freelancers fall into it.
Can I join the Flat Rate Scheme if my turnover is below £90,000?
Yes, if you are VAT-registered. Many smaller businesses register voluntarily and join the scheme, provided their expected VAT-taxable turnover stays at £150,000 or less excluding VAT over the next 12 months.
Does the flat rate apply to zero-rated or exempt sales?
Yes. The flat rate percentage is applied to your total VAT-inclusive turnover, which includes standard-rated, reduced-rated, zero-rated and exempt sales. Exporters and businesses with lots of zero-rated sales should check the numbers carefully.
How do I leave the VAT Flat Rate Scheme?
Tell HMRC through your VAT online account or in writing. You can leave voluntarily at any time, but you must leave if your turnover on the anniversary review passed £230,000 including VAT, and you normally cannot rejoin for 12 months.
Sources and review
This guide was checked against GOV.UK guidance, including the Flat Rate Scheme overview and VAT Notice 733, on 24 July 2026. Figures such as the £150,000 and £230,000 thresholds and the 16.5% limited cost rate are current at the review date.
This guide is general information, not tax advice — your own circumstances may differ, so check with HMRC or an accountant before joining or leaving a scheme. See our disclaimer. Spot an error? Tell us and we'll fix it.