VAT Flat Rate Scheme: Percentages by Trade 2026/27
The VAT Flat Rate Scheme charges a fixed percentage of your gross turnover instead of tracking input and output VAT separately — and the percentage varies enormously by trade. Here is how it works and whether it still pays off in 2026/27.
How the flat rate actually works
Instead of the standard VAT calculation (output VAT minus input VAT), you multiply your gross turnover (including the VAT you charged) by a single percentage set for your trade sector, and pay that to HMRC. The rest of the VAT you charged is retained by the business — effectively becoming extra profit if your genuine input VAT would have been lower than the flat rate implies, or a loss if your input VAT would have been higher.
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Open VAT calculatorWorked example: a hairdresser on the 13% rate
Leah runs a hairdressing salon with quarterly gross turnover (including VAT) of £24,000, and hairdressing carries a flat rate of 13%.
| Item | Amount |
|---|---|
| Gross quarterly turnover (incl. VAT) | £24,000 |
| Flat rate applied | 13% |
| VAT paid to HMRC | £3,120 |
| VAT actually charged to customers at 20% | roughly £4,000 |
| Retained difference | roughly £880 |
Because Leah's genuine input VAT on products and overheads is relatively low, the flat rate leaves her with a retained surplus each quarter compared with paying over the full VAT collected, minus what she would have reclaimed under standard accounting.
Worked example: the limited cost trader trap
Sam is an IT consultant with almost no goods expenditure — mostly services like subcontractor fees and software subscriptions, which do not count as "goods" for this test.
Self-Employed Tax Calculator
Calculate income tax, Class 2 and Class 4 National Insurance for self-employed and sole traders for 2025/26.
Open Self-Employed Tax calculator| Test | Result |
|---|---|
| Goods spend as % of turnover | Under 2% |
| Classification | Limited cost trader |
| Flat rate applied | 16.5% (not the sector's usual, lower rate) |
Because Sam's goods spend is minimal, HMRC classifies him as a limited cost trader and applies the higher 16.5% rate — which, once the extra VAT retained is compared against genuine input VAT recovery under standard accounting, often means limited cost traders are better off leaving the Flat Rate Scheme altogether.
Is it worth joining?
The scheme suits businesses with low genuine purchase costs relative to turnover (many personal services, some construction labour-only trades) who are not caught by the limited cost trader rule, and who value administrative simplicity over precise input VAT tracking. It tends to disadvantage businesses buying significant stock or materials, and businesses caught as limited cost traders, both of which are usually better off on standard VAT accounting instead.
Frequently asked questions
What is the VAT Flat Rate Scheme?
Instead of calculating VAT owed as the difference between VAT you charge customers (output VAT) and VAT you pay on purchases (input VAT), the Flat Rate Scheme lets you pay HMRC a single fixed percentage of your total gross turnover (including VAT), with the percentage set according to your trade sector. You can still charge customers standard VAT on your invoices, but you keep the difference between what you charge and what you pay over, rather than reclaiming input VAT separately (with limited exceptions for large capital purchases).
Can any business use the Flat Rate Scheme?
You can join if your expected VAT-taxable turnover in the next 12 months is £150,000 or less (excluding VAT), and you must leave once your total business income exceeds £230,000. It is aimed squarely at small businesses for whom the administrative simplicity of a single flat percentage outweighs the precision of tracking every input VAT claim.
What percentage do different trades pay under the Flat Rate Scheme?
HMRC publishes a detailed sector table with percentages ranging roughly from 4% (retailing food, confectionery, tobacco, newspaper or children's clothing) up to around 14.5% (some computer and IT consultancy, and labour-only building services). Common examples include hairdressing at 13%, general building or construction services at 9.5%, and business services not listed elsewhere at 12%.
What is a 'limited cost trader' and why does it matter?
If your business spends very little on goods (not services) — specifically less than 2% of your turnover, or less than £1,000 a year, whichever is greater — you are classed as a 'limited cost trader' and must use a flat 16.5% rate regardless of your normal sector percentage. This rule specifically targets service-based businesses (consultants, many contractors) with minimal goods costs, for whom the Flat Rate Scheme would otherwise be unduly generous.
Is there a discount for new businesses joining the scheme?
Yes — you get a 1 percentage point discount off your flat rate percentage for the first year you are VAT registered, which applies from your date of VAT registration (not necessarily your date of joining the Flat Rate Scheme, if different), making the first 12 months modestly cheaper.
Do I still charge VAT to my customers at the normal rate under the Flat Rate Scheme?
Yes — you invoice customers VAT at the normal standard (or applicable reduced) rate exactly as any VAT-registered business would. The Flat Rate Scheme only changes how much of that VAT you hand over to HMRC, not what you charge customers, so the scheme affects your profit margin rather than your prices.
Can I still reclaim VAT on purchases under the Flat Rate Scheme?
Generally no, for day-to-day purchases — the flat percentage is set to already account for typical input VAT recovery for your sector. The one significant exception is capital expenditure goods (not services) costing £2,000 or more including VAT in a single purchase, on which you can still reclaim input VAT in the normal way.
How do I know if the Flat Rate Scheme actually saves me money?
It depends heavily on how much VAT-able expenditure your business has. A service business with very few purchases (consultants, many freelancers) that is not a limited cost trader can genuinely profit from the difference between the standard rate charged and the lower flat rate paid over; a business with substantial input VAT on stock or materials is often better off on standard VAT accounting, reclaiming input VAT precisely rather than accepting a flat percentage that may not reflect its actual costs.
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