Who benefits most from the VAT Flat Rate Scheme in 2026?

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The VAT Flat Rate Scheme (FRS) is an HMRC simplification scheme designed to reduce the administrative burden of VAT for small businesses. Instead of accounting for VAT on individual sales and purchases, you pay a fixed percentage of your gross turnover (VAT-inclusive) to HMRC. **How it works** - Register for FRS if your taxable turnover is £150,000 or less (exclusive of VAT) - You still charge customers the standard 20% VAT - You pay HMRC a **flat rate percentage** of your gross (VAT-inclusive) turnover - The difference between the 20% you charge and your flat rate is retained as profit - You cannot reclaim input VAT on purchases (except for capital goods over £2,000) **Flat rate percentages (selected sectors, 2026/27)** - Computer and IT consultancy: 14.5% - Marketing: 11% - Accountancy or bookkeeping: 14.5% - Architect, civil and structural engineer: 14.5% - Management consultancy: 14% - Legal services: 14.5% - Catering (not fast food): 12.5% - First year: each rate reduced by **1%** for the first year of VAT registration **Worked example (IT consultant)** Gross sales (VAT-inclusive): £120,000 FRS rate: 14.5% VAT paid to HMRC: £120,000 x 14.5% = **£17,400** VAT collected from clients: £120,000 x 1/6 = £20,000 **Profit from FRS**: £20,000 - £17,400 = **£2,600/year** Without FRS, assuming minimal input VAT to reclaim, the result would be similar -- FRS mainly saves time, not necessarily money, for those who can reclaim significant input VAT. **The limited-cost trader trap** If your purchases of goods (not services) are less than 2% of your gross turnover or less than £1,000/year, you are a **limited cost trader** and must apply the **16.5%** flat rate: - 16.5% on £120,000 = £19,800 paid to HMRC - VAT collected: £20,000 - Profit: only £200 -- barely worth the administrative simplification Most service-only businesses (consultants, freelancers, coaches) are limited cost traders and do not benefit from FRS. **When FRS is worth it** FRS works best if: - Your sector rate is below 15% and you have low input VAT to recover - You are in your first year of VAT registration (1% reduction applies) - Your business has very simple finances and the admin saving is valuable - You have high labour costs (not goods) and minimal business spending on goods

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