What is the VAT Flat Rate Scheme and who can use it in 2026/27?

Full answer

The Flat Rate Scheme is designed to simplify VAT accounting for small businesses. Instead of tracking VAT on every purchase and sale, you simply apply a fixed sector percentage to your gross (VAT-inclusive) turnover and pay that amount to HMRC. You still charge standard-rate VAT (20%) to customers on applicable supplies. The profit or saving arises because the flat rate is lower than the standard 20% -- you keep the difference. Example: a management consultant on the 14% flat rate invoices a client £1,200 (£1,000 + £200 VAT). Under FRS, they pay 14% x £1,200 = £168 to HMRC, keeping £32. Sector percentages for 2026/27 include: accountancy (14.5%), advertising (11%), catering (12.5%), computer repair (10.5%), IT consultant (14.5%), general building services (9.5%), and others. Limited cost trader rate: since April 2017, businesses spending less than 2% of gross turnover (or less than £1,000/year) on goods are classified as "limited cost traders" and must use a 16.5% flat rate -- effectively eliminating the profit from FRS for service-heavy businesses. Thresholds: join when taxable turnover (excluding VAT) is at or below £150,000; must leave when it exceeds £230,000. Registration for FRS is separate from standard VAT registration and must be applied for via HMRC. FRS and domestic reverse charge: businesses applying the construction DRC cannot use FRS for those supplies -- if DRC becomes their primary activity they should leave the scheme. FRS is not suitable for businesses that regularly reclaim significant input VAT (e.g., making large capital purchases). HMRC guidance: VAT Notice 733.

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