VAT Flat Rate Scheme Guide 2026/27: Rates, Eligibility and Examples

The Flat Rate Scheme (FRS) simplifies VAT for small businesses. Instead of recording the VAT on every sale and purchase, you charge customers the standard 20% VAT as normal, but you pay HMRC a fixed flat-rate percentage of your gross (VAT-inclusive) turnover. The percentage depends on your trade sector. You keep the difference between the 20% you charge and the lower flat rate you hand over, which is intended to roughly offset the VAT you cannot reclaim on purchases. You generally cannot reclaim VAT on individual purchases, except on capital assets costing 2,000 pounds or more including VAT.

You can join the Flat Rate Scheme if you are VAT-registered and expect your VAT-taxable turnover (excluding VAT) to be 150,000 pounds or less in the next 12 months. You apply to HMRC to join, usually online. You must leave the scheme once your total business income, including VAT, exceeds 230,000 pounds, or if you expect it to exceed that figure in the next 30 days. You cannot rejoin within 12 months of leaving. Certain businesses, such as those that have committed VAT offences or use VAT margin schemes, are excluded.

Each trade sector has its own flat rate set by HMRC. Common examples for 2026/27 include: IT consultancy and computer services 14.5%, management consultancy 14%, accountancy or bookkeeping 14.5%, catering services including restaurants and takeaways 12.5%, and cleaning services 10%. If your business does not fit a listed category you use the 'business services not listed elsewhere' rate. Choosing the wrong sector can lead to underpaying VAT and a later assessment, so check HMRC's published list carefully and keep a note of your reasoning.

The Limited Cost Trader (LCT) rate of 16.5% was introduced to remove the cash advantage the scheme gave to labour-only businesses that buy very few goods. You are a Limited Cost Trader if your spending on relevant goods (not services) is either less than 2% of your VAT-inclusive turnover, or more than 2% but less than 1,000 pounds a year. Relevant goods exclude capital items, food and drink, vehicles and fuel (with some exceptions), so most consultants and contractors fall into this category. At 16.5% the scheme rarely saves money, so many LCT businesses are better off on standard VAT accounting.

If you are in your first year of VAT registration, you get a 1% reduction off your flat rate for the 12 months from your registration date. So an IT consultant on the 14.5% rate would pay 13.5% during their first year. The discount applies to whatever rate you use, including the 16.5% Limited Cost Trader rate, which would become 15.5% in the first year. It is a small but worthwhile saving, and it applies automatically once you tell HMRC your registration date when joining the scheme.

Add up your total gross turnover for the VAT period, including the 20% VAT you charged customers and any zero-rated or exempt income, then multiply by your flat rate percentage. For example, if you invoiced 12,000 pounds plus 2,400 pounds VAT, your gross turnover is 14,400 pounds. At a 14.5% flat rate you would pay HMRC 2,088 pounds. You charged 2,400 pounds, so you keep 312 pounds before considering the VAT you could not reclaim on purchases. Always apply the rate to the gross, VAT-inclusive figure, not the net.

Generally no. The whole point of the scheme is that the lower flat rate already accounts for the VAT you would otherwise reclaim, so you cannot reclaim VAT on day-to-day purchases such as software, stationery or subcontractor costs. The one exception is capital expenditure: you can reclaim the VAT on a single capital asset costing 2,000 pounds or more including VAT, such as a laptop or office equipment bought in one transaction. This makes the scheme less attractive for businesses with significant reclaimable input VAT.

Standard VAT accounting tends to win when your business has significant VAT-bearing costs you can reclaim, when you are a Limited Cost Trader stuck on the 16.5% rate, or when your turnover is high. At higher revenue the flat rate applies to a larger gross figure, so the amount you hand over can exceed the input VAT you would have reclaimed under standard accounting. Businesses that buy a lot of stock, materials or VAT-charging subcontractors usually do better on standard accounting because they recover that input VAT in full.

The compulsory VAT registration threshold for 2026/27 is 90,000 pounds of taxable turnover in any rolling 12-month period. You must also register if you expect to cross 90,000 pounds within the next 30 days alone. The deregistration threshold is 88,000 pounds. You can register voluntarily below the threshold, which some businesses do to reclaim start-up VAT or to appear more established. The Flat Rate Scheme is only available to VAT-registered businesses, so registration is the first step before you can apply to join it.

Yes. The Flat Rate Scheme only changes how much you pay HMRC, not what you charge your customers. You still add VAT to your invoices at the normal rate for the goods or services you supply -- usually 20% standard rate -- and issue proper VAT invoices showing the VAT separately. Your customers, if VAT-registered, reclaim that VAT as usual. The flat rate percentage is purely an internal calculation between you and HMRC for working out the cheque you write to them each quarter.

You can leave the scheme voluntarily at any time by writing to HMRC, and you must leave if your VAT-inclusive turnover exceeds 230,000 pounds or you expect it to within 30 days. Once you leave you switch to standard VAT accounting, recording input and output VAT on every transaction. You cannot rejoin the Flat Rate Scheme for at least 12 months after leaving. It is worth reviewing your position annually, especially if your costs have risen or you have become a Limited Cost Trader, because the scheme can quietly stop being worthwhile.