VAT Flat Rate Scheme
The VAT Flat Rate Scheme lets a small business pay HMRC a fixed percentage of its VAT-inclusive turnover instead of adding up VAT on every sale and purchase. You can join with expected VAT-taxable turnover up to £150,000 excluding VAT, and you cannot usually reclaim VAT on purchases.
Also known as: flat rate VAT scheme, FRS
How it works
On the standard method you charge VAT at 20% on sales, reclaim VAT on purchases and pay HMRC the difference. On the Flat Rate Scheme you still charge your customers 20%, but you hand over a set percentage of your gross turnover and keep the rest. In exchange you give up input VAT recovery, apart from capital assets costing £2,000 or more including VAT.
The percentage depends on your trade sector. There is a one percentage point discount in your first year of VAT registration. The complication for service businesses is the limited cost business test: if your goods spend in a quarter is below 2% of turnover, or below £1,000 a year, you must use the limited cost rate of 16.5%. Consultants, contractors and most software businesses buy few goods and typically fall into this category, which removes most of the benefit the scheme once offered.
Eligibility is checked on joining and on an ongoing basis. You must expect VAT-taxable turnover of no more than £150,000 excluding VAT in the next twelve months, and you must leave once total VAT-inclusive turnover for the year exceeds £230,000. Registration itself is separate: you must register once taxable turnover passes £90,000 on a rolling twelve-month basis.
The scheme is worth modelling rather than assuming. A business with a low goods spend and few VAT-bearing costs may still gain slightly under its sector percentage, while a business buying stock or paying VAT-registered subcontractors is almost always better off on the standard method. Making Tax Digital applies either way, so record keeping and filing software are unchanged.
Worked example (2026/27)
Consultancy billing £8,000 plus VAT in a quarter (2026/27)
| Net sales | £8,000 |
|---|---|
| VAT charged at 20% | £1,600 |
| Gross turnover | £9,600 |
| Limited cost rate 16.5% of £9,600 | £1,584 |
| Retained versus standard method (assuming £300 input VAT) | £16 kept, £300 input VAT lost |
A business failing the limited cost test loses more than it keeps once input VAT exceeds the retained margin.
Who this affects
- Contractors and consultants with low goods purchases
- E-commerce sellers buying stock, who usually do better on the standard method
- SaaS businesses whose main costs are software and salaries, not goods
- New registrations that qualify for the first-year one point discount
- Landlords with VAT-opted commercial property, where input VAT recovery matters
Common mistakes
- Ignoring the limited cost test and applying the old sector percentage
- Forgetting to charge 20% to customers because the flat percentage is lower
- Staying on the scheme after turnover passes the £230,000 exit point
- Joining while planning a large equipment purchase, losing the input VAT
Frequently asked questions
Is the Flat Rate Scheme still worth using?
For many service businesses no, because the limited cost rate of 16.5% removes most of the margin. It can still help low-cost businesses with a favourable sector percentage.
Can I reclaim VAT on the Flat Rate Scheme?
Only on a single capital asset purchase costing £2,000 or more including VAT. Everyday purchases carry no reclaim.
What turnover can I join with?
Expected VAT-taxable turnover of no more than £150,000 excluding VAT over the next twelve months.
Related terms
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Reviewed by Waqas Sagar ACA FCCA FMAAT · Last reviewed 13 September 2026 · Figures for 2026/27 · About our practice
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