The VAT Flat Rate Scheme lets a small VAT-registered business pay HMRC a fixed percentage of its VAT-inclusive turnover, set by its trade, instead of working out VAT charged minus VAT paid. As of October 2026, you can join if you expect VAT taxable turnover of £150,000 or less in the next 12 months, but you can't reclaim VAT on most purchases, and if you spend very little on goods you pay a higher rate of 16.5%.
That last point decides whether the scheme saves you anything. Here's how it works, the rates by trade, and how to tell if it's worth it.
How the flat rate is calculated
You multiply your flat rate by your VAT-inclusive turnover. GOV.UK's example: you bill a customer £1,000 and add VAT at 20%, making £1,200. As a photographer your flat rate is 11%, so you pay HMRC 11% of £1,200, which is £132. You charged £200 in VAT, so the difference stays with you.
In return, you can't reclaim VAT on purchases, except certain capital assets over £2,000. And you get a 1% discount on your rate in your first year as a VAT-registered business.
Flat rates for common trades
| Type of business | Flat rate (%) |
|---|---|
| Accountancy or book-keeping | 14.5 |
| Advertising | 11 |
| Business services not listed elsewhere | 12 |
| Computer and IT consultancy or data processing | 14.5 |
| Entertainment or journalism | 12.5 |
| Hairdressing or other beauty treatment services | 13 |
| Lawyer or legal services | 14.5 |
| Management consultancy | 14 |
| Photography | 11 |
| Publishing | 11 |
| Retailing not listed elsewhere | 7.5 |
| Any other activity not listed elsewhere | 12 |
Those are from GOV.UK's full table, which lists every trade. Labour-only building or construction services, where materials are less than 10% of turnover, are 14.5; above that it's general building at 9.5.
The limited cost business trap
You're a limited cost business if what you spend on goods is less than 2% of your turnover, or less than £1,000 a year if that's more than 2%. If so, you pay 16.5% whatever your trade.
Run the photographer example at 16.5% instead of 11% and the payment on £1,200 comes to just under the £200 of VAT you charged. In other words, almost nothing is left over. Service businesses that buy few goods, such as consultants and designers, should check this test before joining; GOV.UK lets you calculate whether the higher rate applies and which costs count as goods.
A first-year example
The 1% first-year discount is worth spelling out, because it changes the sum. The same photographer, newly registered, would use 10% rather than 11% in year one. On the £1,200 invoice that's £120 to HMRC instead of £132, leaving £80 of the £200 VAT charged rather than £68. After the first anniversary of registration, the full trade rate applies.
Who can join, and who can't
- You must be VAT registered, or register and join at the same time.
- You must expect VAT taxable turnover of £150,000 or less, excluding VAT, in the next 12 months.
- You can't join if you left the scheme in the last 12 months, committed a VAT offence in the last 12 months, joined or could have joined a VAT group in the last 24 months, or are closely associated with another business.
- You can't use it alongside the Cash Accounting Scheme, although it has its own cash-based turnover method.
How to join, step by step
- Check your trade's rate and the limited cost business test.
- If you're not registered yet, register for VAT and join the scheme at the same time.
- If you're already registered, apply online or by post.
- Wait for confirmation in your VAT online account, or by post if you used a paper form.
- Apply your flat rate to VAT-inclusive turnover on each return. If your rate changes mid-period, work out two calculations either side of the change date.
When you have to leave
You must leave if you're no longer eligible, if on the anniversary of joining your turnover in the last 12 months was more than £230,000 including VAT (or you expect it to be), or if you expect income in the next 30 days alone to pass £230,000 including VAT. You can leave voluntarily any time, but you then wait 12 months before rejoining.
If you're weighing the scheme against how your business is set up overall, sole trader vs limited company is worth reading, and the Making Tax Digital thresholds explain the record keeping your returns will need either way.
The verdict
The Flat Rate Scheme can be a real saving for small businesses that buy a fair amount of goods, especially in the first year with the 1% discount. For service businesses caught by the 16.5% limited cost rate, it's close to a wash, because that rate takes almost the whole of the VAT you charge. Do the sum with your own figures before you apply: your rate, your VAT-inclusive turnover, and what you spend on goods. If the 16.5% applies, standard VAT accounting usually makes more sense.
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Frequently asked questions
What is the VAT Flat Rate Scheme?
A scheme where you pay HMRC a fixed percentage of your VAT-inclusive turnover, set by your type of business, and keep the difference from the VAT you charge.
Who can join the Flat Rate Scheme?
As of October 2026, VAT-registered businesses that expect VAT taxable turnover of £150,000 or less, excluding VAT, in the next 12 months.
What is a limited cost business?
One whose spending on goods is less than 2% of turnover, or less than £1,000 a year if that's more than 2%. It pays the higher rate of 16.5%.
Can I reclaim VAT on the Flat Rate Scheme?
Not on most purchases. You can only reclaim VAT on certain capital assets over £2,000.
Is there a first-year discount on the Flat Rate Scheme?
Yes. You get a 1% discount on your flat rate in your first year as a VAT-registered business.
Can I leave the Flat Rate Scheme and rejoin later?
You can leave at any time by contacting HMRC, but you then have to wait 12 months before you can rejoin.
Can I use the Flat Rate Scheme with cash accounting?
No. You can't use it with the Cash Accounting Scheme, but the Flat Rate Scheme has its own cash-based method for calculating turnover.
When must I leave the Flat Rate Scheme?
If your turnover in the last 12 months was more than £230,000 including VAT on the anniversary of joining, or you expect it to be, or you're no longer eligible.
