The VAT Flat Rate Scheme (FRS) was designed to simplify VAT for small businesses: instead of tracking VAT on every purchase, you pay HMRC a fixed percentage of your gross turnover. For some companies it saves money and admin time — but the limited cost trader rules introduced to close a loophole mean it now costs many service businesses more than standard VAT. This guide helps you decide.
Flat Rate Scheme Key Facts 2026
- Join if: VAT-taxable turnover under £150,000 (excl. VAT)
- Must leave when: total income exceeds £230,000
- First-year discount: 1% off your flat rate in year one
- Limited cost trader rate: 16.5% (if goods spend is very low)
- You still charge customers 20% VAT — you just keep the difference
- Cannot reclaim VAT on purchases (except capital assets over £2,000)
How the Flat Rate Scheme works
Under standard VAT accounting you charge 20% VAT on sales, reclaim VAT on purchases, and pay HMRC the difference. Under the FRS you still charge customers the normal 20%, but you pay HMRC a lower flat percentage of your gross (VAT-inclusive) turnover — and you generally cannot reclaim input VAT.
Example: a consultant with a 14.5% flat rate invoices £10,000 + £2,000 VAT = £12,000. They pay HMRC 14.5% × £12,000 = £1,740, keeping £260 of the VAT collected. Whether that beats standard accounting depends entirely on how much reclaimable VAT you would otherwise have.
Flat rate percentages by sector
Each trade sector has its own percentage, set by HMRC. Common examples include IT consultancy (14.5%), management consultancy (14%), accountancy (14.5%), general building/construction labour-only (14.5%), and “any other activity not listed” (12%). Always confirm your sector against HMRC's current list before applying.
In your first year of VAT registration you get a 1% discount off whichever rate applies, which can tip the maths in your favour early on.
The limited cost trader trap
Since April 2017, businesses that spend very little on goods are classed as limited cost traders and must use a 16.5% flat rate regardless of sector. You are a limited cost trader if your spend on relevant goods is less than 2% of turnover, or less than £1,000 a year.
“Relevant goods” excludes services, travel, rent, phone/broadband, food, and capital items — so most consultants, coaches, and software freelancers fall into the 16.5% band. At 16.5% of gross turnover, you effectively hand back almost all the VAT you collect, making standard accounting usually better.
Is it worth it? Standard vs flat rate
The FRS tends to win when: you have low VATable costs but are not a limited cost trader, your customers are VAT-registered (so your 20% charge costs them nothing), and you value simpler bookkeeping.
Standard VAT usually wins when: you buy significant goods, equipment or stock, you incur large reclaimable expenses, or you would be pushed onto the 16.5% limited cost rate. Run both calculations on a typical quarter before deciding — see our VAT return filing guide for how each is reported.
How to join or leave
You can join the FRS when you register for VAT or later, using form VAT600 FRS (or online). You must be eligible on turnover and not have left the scheme in the previous 12 months. HMRC confirms your start date in writing.
You must leave once total income exceeds £230,000, or if you no longer meet the conditions. Many businesses review annually — if your cost profile changes, the better scheme can change with it. If you are not yet VAT registered, start with our VAT registration guide.
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View company packagesFAQ
Who can join the VAT Flat Rate Scheme?
Any VAT-registered business with VAT-taxable turnover of £150,000 or less (excluding VAT) in the next 12 months, provided it did not leave the scheme in the previous 12 months. You must leave once total income exceeds £230,000.
What is a limited cost trader?
A business whose spend on relevant goods is less than 2% of turnover, or less than £1,000 a year. Limited cost traders must use a 16.5% flat rate regardless of their trade sector. Relevant goods exclude services, travel, rent, phone/broadband and capital items.
Do I still charge my customers 20% VAT on the Flat Rate Scheme?
Yes. You charge customers the normal 20% VAT on your invoices. You then pay HMRC a lower flat percentage of your gross turnover and keep the difference. You generally cannot reclaim VAT on purchases.
Can I reclaim VAT under the Flat Rate Scheme?
Generally no — the flat percentage already accounts for input VAT. The one exception is capital assets costing £2,000 or more (including VAT) in a single purchase, on which you can reclaim VAT normally.
Is the Flat Rate Scheme worth it in 2026?
It depends on your costs. If you buy few goods but are not a limited cost trader, and your clients are VAT-registered, it can save tax and admin. If you would fall on the 16.5% limited cost rate or have large reclaimable expenses, standard VAT accounting is usually better.