Answers · UK 2025/26
What is the VAT flat-rate scheme and is it worth it for a small business?
Under the flat-rate scheme you charge customers the normal 20% VAT but pay HMRC a fixed percentage of your VAT-inclusive turnover, keeping the difference. You generally cannot reclaim input VAT except on certain capital assets over GBP 2,000. It suits low-cost service businesses.
Full answer
The flat-rate scheme (FRS) simplifies VAT for small businesses with VAT-exclusive taxable turnover up to GBP 150,000. You still charge customers the standard 20% on your sales, but instead of tracking input and output VAT in detail you pay HMRC a single flat percentage of your gross (VAT-inclusive) turnover. The percentage depends on your trade sector. You normally cannot reclaim input VAT, except on capital assets costing more than GBP 2,000 including VAT. Worked example: a consultant has flat-rate percentage 14.5% (illustrative; sectors vary). She invoices GBP 10,000 net plus 20% VAT = GBP 12,000 gross. Under FRS she pays HMRC GBP 12,000 x 14.5% = GBP 1,740, keeping GBP 8,260 of the gross beyond her net fee. A standard-scheme business would owe GBP 2,000 output VAT less input VAT. So if she has little recoverable input VAT, FRS can be favourable; if she buys a lot of standard-rated stock or services, the standard method usually wins. Watch the limited cost trader rule: if your goods spend is very low, you must use a higher 16.5% rate, which often makes FRS unattractive. There is also a 1% discount in your first year of VAT registration. Use the VAT calculator to compare output VAT under the standard method against your flat-rate liability so you can see which leaves you better off. Confirm your sector percentage, the limited cost trader test and eligibility limits at gov.uk before joining.
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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.