Answers · UK 2025/26
How does the VAT Flat Rate Scheme benefit small businesses in the UK?
The Flat Rate Scheme lets you charge customers 20% VAT but pay HMRC a lower flat rate (e.g., 14.5% for most consultants). You keep the difference as profit, and record-keeping is simpler. It is available to businesses with taxable turnover below £150,000 excluding VAT.
Full answer
The VAT Flat Rate Scheme (FRS) simplifies VAT accounting for small businesses by replacing the standard input/output VAT calculation with a single flat percentage applied to gross (VAT-inclusive) turnover. How it works: - You still charge customers the standard 20% VAT on your sales. - Instead of calculating and deducting input VAT on purchases, you pay HMRC a fixed flat rate percentage of your gross (including VAT) turnover. - The flat rate percentage varies by business sector (set by HMRC). - You keep the difference between the 20% you collected and the flat rate you pay. Example: - IT consultant, flat rate 14.5% (typical rate for management consultancy/IT services as at 2026). - Issue an invoice for £10,000 + £2,000 VAT = £12,000 gross. - Pay HMRC: £12,000 x 14.5% = £1,740. - Keep: £2,000 collected - £1,740 paid = £260 profit on the VAT. First-year discount: - Businesses in their first year of VAT registration receive a 1% reduction off their flat rate -- e.g., 13.5% instead of 14.5%. Eligibility: - Taxable turnover (excluding VAT) must be £150,000 or less. - You cannot use FRS if you have been convicted of a VAT offence or are associated with a FRS business. Limited cost traders: - Businesses that spend less than 2% of their gross turnover on goods (or less than £1,000 per year) must use a 16.5% flat rate -- the "limited cost trader" rate. - This was introduced from April 2017 to prevent service businesses with minimal costs from profiting excessively from the scheme. When FRS may not be beneficial: - Businesses with significant VAT-able purchase costs (e.g., a retailer with high stock costs) may recover more VAT under standard accounting than they retain under FRS.
Related guides
More answers
This answer is informational only and does not constitute financial, tax or legal advice. Figures are for the 2025/26 UK tax year. See our methodology and sources.