VAT
Flat Rate VAT Scheme: How It Works, Eligibility and Rates
The Flat Rate Scheme lets eligible small businesses pay HMRC a fixed percentage of their VAT-inclusive turnover instead of working out VAT on every sale and purchase.
Last reviewed 10 November 2026 · Written by the Right Choice Consulting team
What is the Flat Rate Scheme?
Under the scheme you still charge your customers VAT at the normal rate, but you pay HMRC a fixed percentage of your gross (VAT-inclusive) turnover. The percentage depends on your business sector. You generally cannot reclaim VAT on purchases, apart from certain larger capital assets.
Who can use it?
You can join if you expect your VAT-taxable turnover, excluding VAT, to be £150,000 or less over the next 12 months. You must leave when your turnover exceeds the level set by HMRC, which is currently £230,000 including VAT. Some businesses cannot use the scheme, and the full conditions are on GOV.UK.
A simple example
This example uses an illustrative 12% rate. Your real rate depends on your trade sector.
| Item | Amount |
|---|---|
| Sales excluding VAT | £50,000 |
| VAT charged to customers (20%) | £10,000 |
| Gross turnover (VAT-inclusive) | £60,000 |
| Flat rate payable to HMRC (12% of £60,000) | £7,200 |
| VAT kept by the business | £2,800 |
In this example the business keeps the difference between what it charged and what it pays HMRC, but it cannot reclaim VAT on most purchases.
The limited cost trader rate
If your spending on relevant goods is very low, you are a limited cost trader and must use a higher flat rate of 16.5%. HMRC defines this by comparing spend on goods with your turnover. Many service businesses, such as consultants with few material costs, fall into this category and find the scheme no longer saves money.
First-year discount and when to leave
In your first year of VAT registration you can usually deduct 1% from your flat rate. The scheme can reduce admin, but it is not always cheaper. If you buy a lot of VAT-bearing goods or sell mostly to VAT-registered customers, standard accounting can be better.
Is it right for you?
Compare the standard scheme with the Flat Rate Scheme using real figures before joining. We can model both for your business.
Sources
This article is general information based on UK rules as understood at the review date above. It is not personal tax or legal advice. Rates, thresholds and rules change; confirm the position for your situation with an accountant or on GOV.UK.