Limited company guide
How the VAT Flat Rate Scheme works, the limited cost trader rate of 16.5%, when the scheme still wins, and how to compare it with standard VAT accounting for your company.
Short answer
Under the Flat Rate Scheme you charge VAT at 20% as normal but pay HMRC a fixed percentage of your VAT-inclusive turnover and cannot reclaim input VAT except on capital assets over £2,000. Since the limited cost trader rule, most service businesses with low goods spend pay 16.5%, which leaves little or no benefit, so standard VAT accounting is usually better for anyone with real input VAT.
Written and reviewed by Waqas Sagar Member of ICAEW, Fellow of ACCA, Fellow of AAT, a double graduate and entrepreneur at heart, helping startups grow and serving thousands of businesses nationwide with an excellent team. Published by LimitedCompany.Accountants, 12 London Road, Morden, London SM4 5BQ. Reviewed 12 September 2026 against 2026/27 UK rates and current Companies House and HMRC guidance.
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QuickBooks PartnerCertified ProAdvisor100+ yearsCombined team experienceFully insuredUp to £2m indemnityUnder the Flat Rate Scheme you charge VAT at 20% as normal but pay HMRC a fixed percentage of your VAT-inclusive turnover and cannot reclaim input VAT except on capital assets over £2,000. Since the limited cost trader rule, most service businesses with low goods spend pay 16.5%, which leaves little or no benefit, so standard VAT accounting is usually better for anyone with real input VAT.
How the scheme works
The limited cost trader test
When the scheme still wins
Comparing properly
Before you act
You join if VAT-exclusive taxable turnover is expected to be £150,000 or less, and you must leave once total VAT-inclusive turnover exceeds £230,000. You still invoice at the normal rate; you simply hand over a flat percentage of gross takings.
There is a 1% discount on the flat rate in your first year of VAT registration.
If your spend on relevant goods is less than 2% of turnover, or less than £1,000 a year, you are a limited cost trader and the rate is 16.5% of gross turnover — roughly 19.8% of net, which is close to the full 20% you charged.
Relevant goods exclude services, rent, professional fees, marketing, fuel for most businesses and capital items. Consultants, agencies, developers and most contractors fall into this category.
Businesses with a sector rate well below 16.5% and genuinely low costs, where the administrative simplicity is worth something. Some trades buying physical goods also stay outside the limited cost test.
It rarely wins for a company planning a large equipment purchase, paying significant subcontractors with VAT, or carrying high rent and software costs.
Take twelve months of actual figures. Calculate standard VAT as output VAT less input VAT, then calculate the flat rate as your percentage of gross turnover. Compare the two cash figures, not the percentages.
Remember Making Tax Digital applies either way, so software is not a deciding factor.
Rates, thresholds and deadlines quoted here reflect the 2026/27 UK tax year. Check current GOV.UK guidance, or ask us, before relying on them for your own company.
Primary references
Local help
We work with company directors across London and Surrey from our office at 12 London Road, Morden, London SM4 5BQ. Pick your area, or send the form below and we will call you back.
Frequently asked
16.5% of VAT-inclusive turnover, applying where goods spend is under 2% of turnover or under £1,000 a year.
Only on a single capital asset purchase costing £2,000 or more including VAT.
Usually not. Most consultancies are limited cost traders, so the 16.5% rate removes the benefit.
Yes, you can leave voluntarily at the end of a VAT period, and you must leave once turnover exceeds the exit threshold.
Keep bank statements, sales and platform reports, purchase invoices, payroll records, VAT workings, finance agreements and Companies House correspondence. We confirm the exact list at onboarding and identify gaps before a filing deadline becomes urgent.
The fee depends on transaction volume, record quality, VAT and payroll requirements, historic catch-up and the level of reporting needed. We agree a fixed scope and price before technical work starts, with published packages available on our fees page.
Yes. We request professional clearance, collect the prior records and authorities, check the next Companies House and HMRC deadlines, and give you one clear handover list. The process is normally completed remotely.
Yes. We work through secure cloud records, scheduled reviews and digital approvals, while keeping a named team available by phone, video call and email. Clients can also visit our Morden office by appointment.
We regularly work with Xero, QuickBooks, FreeAgent, Sage and connected sales or expense apps. The right setup depends on transaction volume, integrations and the reports you need, not simply the software brand.
The relevant calendar may include annual accounts, Corporation Tax payment and return dates, confirmation statements, VAT returns, payroll submissions and Self Assessment. We map the dates from your company year end and registrations.
Included approach
Check the current rules
Deadlines, thresholds and filing rules change. GOV.UK and Companies House publish the current statutory position; advice should then be applied to your company’s circumstances.
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