Flat Rate VAT Scheme
By Mustafa Bilgic · Updated 24 August 2026
The Flat Rate VAT scheme lets small businesses pay a fixed percentage of gross turnover to HMRC instead of calculating VAT on every invoice and purchase. For some sectors, the flat rate is lower than the standard VAT fraction, which means you keep the difference. For others -- particularly those with few VAT-able purchases -- the limited cost trader rules remove most of the advantage. Our flat rate VAT calculator shows whether the scheme saves or costs you money.
The Flat Rate Scheme is only worth it if the maths works for your sector and your spending pattern. The calculator does that comparison in seconds.
How the Flat Rate Scheme Works
You charge VAT to customers at the standard rate as normal. The difference is in what you pay HMRC. Instead of calculating output VAT minus input VAT on each transaction, you apply a single flat-rate percentage to your VAT-inclusive turnover and pay that amount. The percentage depends on your trade sector -- HMRC publishes a list of categories and their rates.
In the first year of VAT registration, you get a 1% discount on the flat rate. After that, the published rate for your sector applies. You cannot reclaim input VAT on purchases (with one exception: capital assets over a set value). That trade-off is the whole point -- simpler bookkeeping in exchange for giving up individual input VAT claims. Use our flat rate VAT calculator to compare the flat rate bill against what you would pay under standard VAT accounting.
The Limited Cost Trader Test
Since April 2017, businesses that spend less than 2% of their VAT-inclusive turnover on relevant goods (or less than a fixed annual amount, whichever is greater) are classified as limited cost traders. Limited cost traders pay a flat rate of 16.5% regardless of their trade sector, which is close to the standard VAT fraction and removes almost all benefit from the scheme.
Relevant goods exclude capital expenditure, food and drink for yourself or staff, and vehicles and vehicle parts. For service-based businesses that buy mainly labour and software subscriptions, the limited cost trader test is hard to pass. If you fall into this category, the flat rate scheme adds admin without saving money. Run the test on your last 12 months of purchases before you decide whether to join or stay on the scheme.
Which Businesses Benefit Most
Businesses that charge VAT on labour-heavy services but whose flat-rate percentage is well below the standard VAT fraction benefit most. The gap between the VAT you charge customers and the flat rate you pay HMRC is yours to keep. Sectors with low flat rates and minimal purchases see the biggest gain, provided they clear the limited cost trader hurdle.
Businesses with significant VAT-able input costs -- manufacturers buying raw materials, retailers purchasing stock -- usually save more under standard VAT accounting because they reclaim the input VAT on those purchases. The flat rate scheme does not allow that reclaim, so the more you spend on VATable supplies, the less attractive the scheme becomes. There is no penalty for leaving the scheme, but you must stay on for at least 12 months once you join.
Joining, Leaving, and Record-Keeping
You can apply for the Flat Rate Scheme if your estimated VAT-taxable turnover in the next 12 months is below the current eligibility threshold (check HMRC's published limit). Apply online through your Government Gateway account. HMRC will confirm your trade sector and the flat rate percentage that applies.
You must leave the scheme if your total business income (including VAT-exempt and non-business income) exceeds the exit threshold, or if you are no longer eligible. You can also leave voluntarily after the minimum 12-month stay. Record-keeping is simpler than standard VAT -- you do not need to log input VAT on every purchase -- but you still need to issue proper VAT invoices to your customers and file quarterly returns. This is general guidance only.
Not tax advice -- speak to your accountant.
Frequently asked questions
Can I reclaim VAT on purchases under the Flat Rate Scheme?
Not on day-to-day purchases. The only exception is single capital assets costing more than a set threshold (including VAT). Everything else is absorbed into the flat rate percentage.
What happens if I pick the wrong trade sector?
HMRC may reclassify your business and adjust your flat rate. If you are unsure which sector applies, ask your accountant or call the VAT helpline before you register. Using the wrong rate can result in underpayment and penalties.
Is the 1% first-year discount automatic?
Yes. If you join the Flat Rate Scheme within 12 months of your VAT registration date, the 1% discount is applied automatically for your first year on the scheme.
Can I use the Flat Rate Scheme alongside the Cash Accounting Scheme?
Yes. You can combine the two if you meet the eligibility criteria for both. Cash accounting lets you pay VAT based on when you receive payment rather than when you issue the invoice, which helps cash flow.