YF AccountingLast updated: 23 July 2026
6 min read
The VAT Flat Rate Scheme (FRS) lets you pay HMRC a fixed percentage of your VAT-inclusive turnover instead of working out the difference between the VAT you charge and the VAT you reclaim. You still invoice customers at the normal 20%, but your VAT return becomes one simple multiplication. For some businesses it saves both admin and money; for others — especially service businesses caught by the 16.5% “limited cost” rate — it quietly costs more than standard VAT. This guide explains how the scheme works in 2026, who can join, and how to tell which camp you are in.
How does the VAT Flat Rate Scheme work?
Under standard VAT accounting, you add up the VAT on every sale, deduct the VAT on every purchase, and pay HMRC the difference. That means tracking VAT on each individual transaction.
Under the Flat Rate Scheme, you apply a single percentage — set by HMRC for your business sector — to your gross (VAT-inclusive) turnover, and that is what you pay. You do not reclaim VAT on your day-to-day purchases, which is precisely why the maths can go either way: the flat rate is set below 20% to compensate you, roughly, for the input VAT you are giving up.
Three things stay the same. You still charge your customers VAT at the normal rate, you still issue proper VAT invoices, and you still file quarterly VAT returns — the return is just far quicker to prepare.
What are the flat rate percentages in 2026?
Rates range from 4% to 16.5% depending on your sector, and there is a 1% discount on your rate for your first year of VAT registration. A selection of the current rates:
| Business type | Flat rate |
|---|---|
| Retailing food, confectionery or newspapers | 4% |
| Pubs | 6.5% |
| Retailing not listed elsewhere | 7.5% |
| General building or construction services | 9.5% |
| Catering, including restaurants and takeaways | 12.5% |
| Hairdressing and beauty treatment | 13% |
| Management consultancy | 14% |
| Accountancy, IT consultancy, labour-only building services | 14.5% |
| Limited cost business (any sector) | 16.5% |
The full list runs to over 50 categories on GOV.UK. If your business straddles more than one, you use the rate for whichever activity generates most of your turnover — you do not split it.
What is a limited cost business?
This is the rule that changed everything when it arrived in 2017, and it is the first thing I check for any client considering the scheme. You are a “limited cost business” in any VAT period where your spending on goods (not services) is either less than 2% of your VAT-inclusive turnover, or more than 2% but under £1,000 a year. If that is you, your flat rate is 16.5% regardless of your sector.
Here is why that matters: 16.5% of your gross turnover works out at 19.8% of your net turnover. In other words, you hand HMRC almost all the VAT you collect while reclaiming nothing on purchases. You would nearly always be better off on standard VAT accounting.
Note the word goods. Software subscriptions, subcontractors, rent, accountancy fees, fuel for most service businesses and capital equipment do not count towards the 2% test. Most contractors, consultants and freelancers buy very few actual goods, which is exactly who the rule was aimed at.
Who can join the Flat Rate Scheme?
You can apply to join if you are VAT registered and you expect your taxable turnover in the next 12 months to be £150,000 or less, excluding VAT. If you are not yet registered, our guide to the £90,000 VAT threshold covers when registration becomes compulsory.
You apply online through your VAT account or by post on form VAT600FRS. Once you are in, you stay in until you leave voluntarily or you are forced out: if your total income in the 12 months to your scheme anniversary is more than £230,000 including VAT, you must leave — unless HMRC agrees your income in the next year will fall below £191,500.
A few businesses are excluded altogether, including those using certain margin schemes and anyone who left the FRS within the last 12 months.
Worked example: flat rate vs standard VAT
Take an IT consultant billing £60,000 a year plus VAT, so £72,000 gross. She spends £4,800 (VAT-inclusive) on standard-rated costs each year, of which £800 is VAT — mostly software, insurance and accountancy, with very few goods.
| Method | Calculation | VAT paid to HMRC |
|---|---|---|
| Standard VAT | £12,000 output VAT − £800 input VAT | £11,200 |
| FRS at 14.5% (IT consultancy) | 14.5% × £72,000 | £10,440 |
| FRS at 13.5% (first-year discount) | 13.5% × £72,000 | £9,720 |
| FRS at 16.5% (limited cost business) | 16.5% × £72,000 | £11,880 |
If she qualifies for the 14.5% sector rate, the scheme saves her £760 a year — £1,480 in year one with the discount. But because she buys almost no goods, HMRC would class her as a limited cost business, so her real rate is 16.5% and the scheme costs her £680 a year. Same person, same numbers, opposite answer. This is why you run the calculation before joining, not after.
Can I reclaim any VAT on the Flat Rate Scheme?
Generally no — that is the trade-off. The one useful exception is capital assets: if you buy a single capital item (or a group of items on one invoice) costing £2,000 or more including VAT, you can reclaim the VAT on it in the normal way. A £2,400 laptop-and-monitor order qualifies; two separate £1,200 purchases do not.
If you are planning significant spending — a fit-out, a van, serious equipment — that alone can make standard VAT accounting the better home for you.
Does Making Tax Digital apply to the Flat Rate Scheme?
Yes. Every VAT-registered business is within Making Tax Digital for VAT, flat rate or not. You must keep digital records and file your returns through compatible software such as Xero, QuickBooks or FreeAgent. The small mercy is that FRS users do not have to record purchase invoices digitally for VAT purposes (other than capital assets over £2,000), which keeps the bookkeeping genuinely light. Our small business VAT guide covers the wider MTD rules.
Frequently asked questions
Do I still charge my customers 20% VAT on the Flat Rate Scheme?
Yes. The Flat Rate Scheme only changes what you pay to HMRC, not what you charge. You invoice at the normal VAT rate for whatever you sell — usually 20% — and issue standard VAT invoices. The flat rate percentage is then applied to your VAT-inclusive turnover when you prepare your return.
Is the VAT Flat Rate Scheme worth it?
It depends on your sector rate and how much input VAT you would otherwise reclaim. It tends to suit businesses with low VATable costs that are not caught by the limited cost rules. If your rate would be 16.5%, or you have significant purchases or capital spending, standard VAT accounting almost always works out cheaper. Run both calculations on real numbers before deciding.
What is the turnover limit for the Flat Rate Scheme?
You can join if you expect taxable turnover of £150,000 or less (excluding VAT) in the next 12 months. Once in, you must leave if your total income in a year exceeds £230,000 including VAT, unless HMRC accepts it will drop below £191,500 in the following year. You can also leave voluntarily at any time.
What is the 1% first-year discount?
In your first 12 months as a VAT-registered business, HMRC knocks 1% off your flat rate — so a 14.5% rate becomes 13.5%. The discount runs from your VAT registration date, not from when you join the scheme, so joining late eats into it. It applies to the 16.5% limited cost rate too, reducing it to 15.5%.
Can I switch back to standard VAT accounting?
Yes. You can leave the Flat Rate Scheme voluntarily by writing to HMRC, and it takes effect from a date you agree with them — usually the end of a VAT period. Bear in mind that once you leave, you cannot rejoin for 12 months, so it is worth being sure the numbers support the move first.
Need a hand with VAT?
I run these comparisons for clients all the time — it takes minutes with a set of real figures, and it regularly saves hundreds of pounds a year in one direction or the other. I am a Manchester-based, fixed-fee accountant: sole traders from £35 a month, limited companies from £50 a month, VAT returns included where you need them, and one point of contact throughout.
Book a free, no-obligation call or ring 0161 531 0959 and I will tell you straight whether the Flat Rate Scheme fits your business.
This article is general information, not personal tax advice. For advice on your own situation, please get in touch.
Founder of YF Accounting — a fixed-fee, fully digital accountancy practice in Manchester serving SMEs, sole traders and landlords across the UK. One point of contact, unlimited support, no surprise bills.
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