The VAT Flat Rate Scheme lets eligible small businesses pay HMRC a fixed percentage of VAT-inclusive turnover instead of calculating VAT on most purchases. Discover the rules, industry rates and the often-overlooked 16.5% limited cost business test.
What is the VAT Flat Rate Scheme? It is an optional UK VAT accounting method for eligible small businesses. You normally charge customers VAT at the usual rate, but calculate your payment to HMRC using a fixed percentage of VAT-inclusive turnover. In return for simpler calculations, you generally cannot reclaim VAT on everyday purchases.
How does the VAT Flat Rate Scheme work?
Under normal VAT accounting, you typically pay HMRC the VAT charged to customers minus recoverable VAT on purchases. Under the Flat Rate Scheme, you multiply your VAT-inclusive flat-rate turnover by your applicable percentage. That percentage depends on your business sector, unless the limited cost business rule applies.
For example, a business invoices £10,000 plus £2,000 VAT. At a 12% flat rate, its illustrative flat-rate VAT payment is £1,440 (12% of £12,000), before any special adjustments. The difference between the £2,000 VAT collected and £1,440 paid is £560, but this is not automatically a £560 saving: you generally lose the ability to reclaim VAT on ordinary costs.
VAT Flat Rate Scheme percentages by business type
These are selected HMRC sector percentages. The appropriate sector is based on what your business actually does, rather than simply its company name or SIC code. The 16.5% limited cost rule overrides these rates where applicable.
| Business activity | Flat rate |
|---|---|
| Accountancy or bookkeeping | 14.5% |
| Computer and IT consultancy | 14.5% |
| Advertising | 11% |
| Business services not listed elsewhere | 12% |
| Retailing not listed elsewhere | 7.5% |
| General building or construction services | 9.5% |
| Labour-only building or construction services | 14.5% |
| Transport or storage, including taxis and couriers | 10% |
| Hairdressing and beauty treatment | 13% |
| Any other activity not listed elsewhere | 12% |
| Limited cost business (any sector) | 16.5% |
Sector selection and the limited cost test should be reviewed before relying on a percentage. See HMRC's full flat rate list.
What is a limited cost business?
A limited cost business normally has relevant goods expenditure below 2% of its VAT-inclusive flat-rate turnover, or below £1,000 a year (pro-rated for shorter VAT periods) even if the 2% test is met. The flat rate is then 16.5%, irrespective of the normal sector percentage. This test must be considered for each VAT period.
Only qualifying goods count. Services, rent, accountancy fees, software subscriptions and many other common overheads do not count. Capital expenditure, food or drink for the business or employees, and vehicle costs (unless in a qualifying transport business) are generally excluded. Relevant goods must be used exclusively for the business.
VAT Flat Rate Scheme calculator
Compare an illustrative flat-rate VAT liability with standard VAT accounting, and test whether your qualifying goods spending triggers the 16.5% rate. Enter values for a single VAT return period.
Calculate your VAT position
Illustration assumes all sales are UK standard-rated at 20%, all input VAT entered is recoverable, no capital-goods adjustments, and the entire period qualifies for any first-year discount. It is not a full VAT return or eligibility determination. Real turnover and VAT treatment can be more complex.
Who can join the Flat Rate Scheme?
You must be VAT registered (or registering) and expect VAT-taxable turnover of £150,000 or less excluding VAT in the coming 12 months. Other exclusions apply, including certain VAT groups, closely associated businesses, margin schemes and businesses that recently left the scheme.
The £90,000 VAT registration threshold is a different test. A business may voluntarily register below that amount, but doing so does not automatically make the Flat Rate Scheme worthwhile. See our VAT registration guide.
When do you have to leave?
You normally leave if VAT-inclusive turnover exceeds £230,000 at the relevant annual review, or if you expect income in the next 30 days alone to exceed £230,000. A narrow exception can apply to a one-off increase where the next year's turnover is expected to be no more than £191,500 and HMRC agrees. Other changes can also end eligibility.
Is the Flat Rate Scheme worth it?
| Flat Rate Scheme may suit | Standard VAT may suit |
|---|---|
| Businesses with few VAT-bearing purchases | Businesses with substantial reclaimable input VAT |
| Businesses with a favourable sector percentage | Limited cost businesses paying 16.5% |
| Owners seeking simpler routine VAT calculations | Businesses with significant equipment or stock purchases |
Do not choose based on the percentage alone. Compare actual expected output VAT, input VAT, goods costs, sector classification and your customer mix. If you sell to consumers, VAT-inclusive pricing can also affect competitiveness.
How do you join the VAT Flat Rate Scheme?
- Confirm VAT registration and expected turnover eligibility.
- Choose the correct business sector and check the limited cost rules.
- Compare the scheme against standard VAT accounting using realistic purchase data.
- Apply to HMRC when registering for VAT, or through the existing VAT Flat Rate Scheme application process.
- Wait for HMRC confirmation of the effective start date and configure your bookkeeping software accordingly.
Applications for existing VAT-registered businesses can be made using HMRC's Flat Rate Scheme application service. Your effective date is not necessarily the day you apply.
VAT Flat Rate Scheme and Making Tax Digital
Joining the scheme does not remove your Making Tax Digital for VAT obligations. VAT-registered businesses generally need compatible software and digital VAT records. The flat rate affects how your liability is calculated, not the need to submit returns correctly. See our Making Tax Digital guide.
Common VAT Flat Rate Scheme questions
Do I still charge 20% VAT to customers?
Yes, where the supply is standard-rated. Your flat rate percentage is used to calculate what you pay HMRC, not the VAT rate printed on your invoice.
Can I reclaim VAT on purchases?
Generally not on routine purchases. A limited exception can apply to certain capital goods bought in a single purchase costing at least £2,000 including VAT, subject to the detailed rules.
Does the 1% discount apply when I first join?
It generally applies during the first 12 months of VAT registration, not the first 12 months after joining the Flat Rate Scheme. Eligibility and exact dates matter.
Can I use the Flat Rate Scheme if I am a contractor?
Potentially, but many contractors and consultants have low qualifying goods expenditure and may fall under the 16.5% limited cost rate. A detailed comparison is particularly important.
Can I switch back to normal VAT accounting?
Yes, subject to the relevant notification and timing rules. If you leave, you normally cannot rejoin within 12 months.
Is the £150,000 threshold the same as the VAT registration threshold?
No. The Flat Rate Scheme joining limit is £150,000 of expected VAT-taxable turnover excluding VAT; the compulsory VAT registration threshold is £90,000.
Need help choosing the right VAT scheme?
At The Online Accountants, our ACCA-qualified team helps owner-managed limited companies and small businesses understand their VAT obligations, compare accounting methods and avoid costly scheme mistakes. Clear advice, fixed-price services and a dedicated point of contact.
Speak to an accountant View our feesGuide reviewed October 2026. UK general guidance only; sector rates and VAT rules should be checked against HMRC before acting.