Tax year: 2026/27 | Last reviewed: 2 October 2026
The VAT Flat Rate Scheme is designed to make VAT simpler for small businesses. Instead of working out the VAT on every sale and purchase, you pay HMRC a fixed percentage of your gross turnover. For some businesses it still saves money as well as time. For others, especially since the limited cost trader rules arrived, it costs more than standard VAT.
How it works
You still charge your customers VAT at the normal rate, usually 20%. But instead of paying HMRC the difference between VAT on sales and VAT on purchases, you pay a flat percentage of your VAT-inclusive turnover. The percentage depends on your business sector.
Example: a marketing consultant with a 12.5% flat rate bills £10,000 plus £2,000 VAT in a quarter. Under the scheme she pays HMRC £12,000 x 12.5% = £1,500, and keeps £500 of the VAT she charged. She cannot reclaim VAT on most purchases.
In your first year of VAT registration you get a 1% discount on your sector rate.
Eligibility
- You can join if your VAT-exclusive taxable turnover for the next 12 months is expected to be £150,000 or less.
- You must leave once your total VAT-inclusive turnover goes over £230,000.
- Some businesses cannot join, for example if you left the scheme in the past 12 months or are closely associated with another business.
The limited cost trader rule
Since April 2017, if your spending on goods is very low you must use a rate of 16.5%, whatever your sector. You are a limited cost trader if your VAT-inclusive spend on relevant goods is either:
- less than 2% of your VAT-inclusive turnover, or
- more than 2% but less than £1,000 a year (£250 a quarter).
Relevant goods exclude services, capital items, food and drink for staff, and fuel for most businesses. Many consultants, contractors and IT businesses fall into this test. At 16.5% of gross turnover you pay almost all of the VAT you charge, so standard VAT accounting is usually cheaper.
Capital purchases
On the scheme you can still reclaim VAT on a single capital purchase of £2,000 or more including VAT, such as a van or machinery.
When it is worth it
- Your sector rate is low relative to your margin and you are not a limited cost trader
- Your costs carry little VAT, for example mainly wages, insurance or rent
- You value simpler records and are in your first year with the 1% discount
When it is not
- You are a limited cost trader at 16.5%
- You buy a lot of standard-rated goods or have large VAT-able overheads
- You make zero-rated or exempt sales, which you still pay the flat rate on
With Making Tax Digital and cloud software, standard VAT is now much less work than it used to be, which has reduced the main attraction of the scheme. Compare it with the Cash Accounting Scheme and read about the £90,000 VAT threshold.
FAQs
Can I leave the Flat Rate Scheme?
Yes, at any time by telling HMRC, but you cannot rejoin for 12 months.
Do I show the flat rate on my invoices?
No. You issue normal VAT invoices at 20%. The flat rate only affects what you pay HMRC.
What is the flat rate for my business?
HMRC publishes a list of sector percentages, from 4% for food retailers to 14.5% for some professional services. Speak to us and we will confirm the right category.
Talk it through with Digivolve
We run the flat rate versus standard VAT numbers on your actual sales and costs before you decide.
This article is general information based on the rules for the 2026/27 tax year as at October 2026. It is not personal tax advice. Rates and thresholds can change, so please speak to us before acting.