For small businesses that are VAT-registered, calculating and accounting for VAT can be time-consuming. The VAT Flat Rate Scheme is designed to reduce that burden. Instead of tracking VAT on every individual sale and purchase, you apply a single fixed percentage to your gross VAT-inclusive turnover and pay that amount to HMRC.
The scheme does not change how much VAT you charge your customers. What it changes is how much you pay to HMRC. For many businesses, particularly those with lower costs, the difference between what you collect and what you pay can represent a financial benefit.
This article explains how the flat-rate scheme for small businesses works, who can join, the thresholds, and what to consider before applying.
What Is the VAT Flat Rate Scheme?
The VAT Flat Rate Scheme allows eligible businesses to pay HMRC a fixed percentage of their gross VAT-inclusive turnover, rather than accounting for VAT on each transaction. HMRC sets the fixed rates, which vary by business type.
Because the flat rates are calculated as averages for each trade sector, they are generally lower than the standard 20% VAT rate. This is because the input tax, the VAT you pay on purchases, is already factored into the flat-rate calculation.
When you join the scheme, you do not separately reclaim VAT on your purchases as you would under standard VAT accounting. The main benefits, as set out by HMRC, are simplified record-keeping, fixed-rate percentages lower than the standard rate, and improved cash flow management.
Flat Rate Scheme Eligibility and Threshold
VAT Registration
You must be VAT-registered before you can join the flat rate scheme. For 2025/26, the mandatory VAT registration threshold is £90,000, meaning your business must register for VAT once its taxable turnover exceeds £90,000 in 12 months. You can also register voluntarily if your turnover is below this threshold. The VAT deregistration threshold is £88,000. Both figures have applied since 1 April 2024.
Joining the Flat Rate Scheme
Once VAT-registered, to be eligible to join the flat rate scheme, HMRC requires that:
- your taxable turnover, excluding VAT, in the next year will be £150,000 or less
- your business is not “associated” with another business in the way HMRC defines
Your taxable turnover for this test includes the value of your standard-rated, zero-rated, and reduced-rated supplies. It excludes expected sales of capital assets and the VAT itself.
If you have not yet registered for VAT, you can apply for the scheme at the same time as your VAT registration. If you are already VAT-registered, you apply separately using form VAT600FRS.
Staying in the Scheme
Once you are on the flat rate scheme, you do not have to leave simply because your turnover grows, but HMRC requires you to check your turnover at least once a year on the anniversary of joining.
You must leave the scheme if your total VAT-inclusive income, including exempt supplies, but excluding sales of capital assets, exceeds £230,000 in the year ending on your anniversary date. You must also leave if there are reasonable grounds to believe your income in the next 30 days alone will exceed £230,000.
If your total income exceeds £230,000 (including VAT), you are normally required to leave the Flat Rate Scheme. However, in limited circumstances, HMRC may exercise discretion where the increase is temporary and unexpected, and turnover is expected to fall back below the threshold. This is not an automatic right and would require HMRC’s agreement.
Who Cannot Join the Flat Rate Scheme
HMRC specifies that you cannot join the scheme if any of the following apply:
- You are not registered for VAT
- You use, or are required to use, the second-hand margin scheme, the auctioneers’ scheme, or the Tour Operators’ Margin Scheme
- You are required to operate the Capital Goods Scheme for certain capital items
- You stopped using the flat rate scheme within the previous 12 months
- in the previous 12 months, you accepted a compound penalty offer, were convicted of a VAT offence, or were assessed with a penalty for conduct involving dishonesty
- you are, or within the past 24 months have been, registered for VAT as a business division
- You are, or within the past 24 months have joined a VAT group
- your business is “associated” with another meaning one business is under the main influence of another, or two businesses are closely bound by financial, economic, and organisational links
You also cannot use the flat rate scheme alongside the Cash Accounting Scheme or Retail Schemes. Nor can it be used for supplies subject to the VAT domestic reverse charge.
Excluded reverse charge supplies include mobile phones, computer chips, emissions allowances, wholesale gas and electricity, wholesale electronic communications, renewable energy certificates, and building and construction services covered by the domestic reverse charge.
How the Flat Rate Is Calculated
Your Flat Rate Percentage
The flat rate you use depends on your trade sector, the sector that most closely describes what your business will be doing in the coming year. HMRC publishes the full list of trade sectors and their percentages on gov.uk. A selection of common sectors is shown below.Â
If your business spans more than one sector, you apply the percentage for the sector that generates the greater part of your turnover. You do not split your turnover or apply more than one rate.Â
Limited Cost Businesses
Since 1 April 2017, businesses classified as “limited cost businesses” must use a flat rate of 16.5%, regardless of their trade sector.
You are a limited cost business if the amount you spend on relevant goods, including VAT, is either:
- less than 2% of your VAT flat rate turnover, or
- more than 2% of your VAT flat rate turnover but less than £1,000 per year for a quarterly return, the equivalent figure is £250
Relevant goods are goods used exclusively for your business. HMRC specifically excludes the following from this test:Â
- vehicle costs unless you operate in the transport sector using your own or a leased vehicle,
- food or drink for you or your staff,Â
- capital expenditure goods of any value,Â
- goods for resale where selling is not your main business activity,Â
- and any services including accountancy fees, advertising costs, rent, downloaded software, and anything provided electronically are all classified as services and therefore do not count.
This means that most service-based businesses, consultants, accountants, designers, and IT contractors will typically be classified as limited-cost businesses and will pay 16.5%. At this rate, the scheme offers less financial benefit than it does for businesses with meaningful goods costs relative to turnover.
Because costs can fluctuate, a business may be a limited-cost business in one VAT period but not in another. HMRC states that businesses whose goods costs are close to the 2% threshold may need to complete the test each time they file their VAT return.
The 1% First-Year Discount
If you are in your first year of VAT registration, you are entitled to a 1% reduction in your flat rate percentage. This discount runs for the 12 months following your VAT registration date, not the date you joined the scheme. You cannot claim this reduction if you registered for VAT more than 12 months after you were required to do so.
How You Calculate What You Pay
You multiply your flat rate percentage by your VAT-inclusive turnover for the period. VAT-inclusive turnover is your business income, including the VAT charged on it, not the net figure.
For example, you bill a customer £1,000 and add VAT at 20%, giving a VAT-inclusive total of £1,200. If your flat rate for photographers is 11%, you pay 11% of £1,200 to HMRC, which is £132. The remaining £68 of the VAT collected is retained by the business.
Flat Rate VAT Registration: How to Apply
You can apply to join the flat rate scheme at the same time as registering for VAT. If you are already VAT-registered, you apply using form VAT600FRS, available on gov.uk.
HMRC will confirm acceptance in writing and provide a start date. If you apply using form VAT600FRS close to the time you registered for VAT, you can start using the scheme from your VAT registration date.
Input Tax and Capital Expenditure in Flat Rate Scheme
Because the flat rate builds in an allowance for input tax, you generally cannot reclaim VAT on your purchases. There is one important exception: you can reclaim VAT on a single purchase of capital-expenditure goods where the total cost, including VAT, is £2,000 or more. This is handled outside the flat rate scheme by claiming the input tax in box 4 of your VAT return.
Capital expenditure goods in this context mean goods bought to be used in the business over time, such as a van or a computer, but specifically excludes goods bought for resale, goods consumed within one year, goods for hire, and goods covered by the Capital Goods Scheme.
If you intend to buy assets covered by the Capital Goods Scheme, you must leave the flat rate scheme and notify HMRC immediately. The Capital Goods Scheme applies to computers and computer equipment with a VAT-exclusive value of £50,000 or more, and to land, buildings, and civil engineering works with a VAT-exclusive value of £250,000 or more.
Is the Flat Rate Scheme for Small Businesses Worth It?
The flat rate scheme is most beneficial to small businesses with relatively low costs. If your business spends a significant proportion of its income on VAT-rated purchases, you would normally reclaim a substantial amount of input tax under standard VAT accounting, which the flat rate scheme does not allow. In those circumstances, the scheme may cost you more than standard accounting.
The scheme also offers less benefit if you regularly receive VAT repayments from HMRC, have VAT-registered customers (since you must still issue full VAT invoices and calculate VAT in the normal way for them), or trade in goods from outside the UK, which can add complexity.
HMRC is clear that because the flat rates are averages, some businesses will pay more VAT on the scheme than they would under standard accounting. Before applying, it is worth calculating whether the scheme produces a better or worse outcome for your specific situation, based on your actual costs and sector rate.
How Can Sterling & Wells Accountants Help?
Stop overpaying VAT or risking penalties from the wrong scheme. We help small businesses across the UK with VAT registration, Flat Rate Scheme applications, ongoing returns, and switching schemes. Hence, your VAT position is always accurate and working in your favour.
Leaving the Scheme
You can leave voluntarily at any time by writing to HMRC. You must leave if you become ineligible, for example, if your total VAT-inclusive income exceeds £230,000 at your annual review, or if you expect your income in the next 30 days alone to exceed £230,000.Â
Once you leave, you cannot rejoin for 12 months.Â
When you leave, you move back to standard VAT accounting. If your stock of standard-rated goods has increased while you were on the scheme, you may be able to make a stock adjustment and claim input tax on that increase in your first VAT return after leaving.Â
Key Flat Rate Scheme Thresholds and Rates (2025/26)
Conclusion
The VAT Flat Rate Scheme is a practical simplification for eligible small businesses, but it is not automatically the right choice. The flat rate you pay depends on your trade sector and whether you are classified as a limited cost business. For service-based businesses with low goods costs, the 16.5% limited-cost business rate often means the scheme offers little financial advantage over standard accounting, even if it still reduces administrative effort.
The right approach is to run the numbers before applying. Calculate your likely VAT liability under the flat rate scheme using your actual sector rate and cost profile, then compare it against what you would pay and reclaim under standard accounting. If the flat rate scheme produces a better outcome and your turnover is within the £150,000 joining threshold, applying is straightforward. If not, staying on standard VAT accounting will typically cost less.
