UK VAT Schemes for Small Businesses 2026/27

VAT Registration -- £90,000 Threshold

A business must register for VAT if its taxable turnover exceeds £90,000in any rolling 12-month period, or if it is likely to exceed this within the next 30 days alone. Taxable turnover includes all supplies subject to VAT at the standard (20%), reduced (5%) or zero (0%) rate -- but not exempt supplies (insurance, finance, most education, healthcare).

Once registered you must charge VAT on taxable supplies, file VAT returns (usually quarterly), pay VAT to HMRC and can reclaim input VAT on business costs. The registration threshold has been £90,000 since 1 April 2024 (increased from £85,000). It is frozen until at least April 2026.

Voluntary registration is possible at any turnover level. Benefits include reclaiming input VAT on purchases (particularly useful for businesses with large capital costs or significant VAT-bearing overheads) and appearing VAT-registered to business customers who can themselves reclaim the VAT charged. Disadvantage: extra administration and potential pricing disadvantage with non-VAT-registered competitors.

Standard VAT Accounting

Under standard (non-scheme) VAT accounting, businesses file quarterly returns showing:

• Output VAT -- VAT charged on sales invoices in the quarter (whether or not paid).
• Input VAT -- VAT paid on business purchases in the quarter (whether or not the invoice is paid).
• Net VAT due = output VAT minus input VAT. If positive, you pay HMRC; if negative, HMRC repays you.

Standard accounting gives full flexibility to reclaim input VAT on all business costs including capital expenditure, services and overheads. It is the most appropriate method for businesses with significant purchases or variable VAT rates on their supplies. All businesses above the FRS or AAS thresholds must use standard accounting.

Flat Rate Scheme (FRS)

The Flat Rate Scheme simplifies VAT by replacing the tracking of individual input and output VAT with a single fixed-rate payment. The business still charges customers 20% standard-rate VAT, but pays HMRC a lower fixed percentage of gross (VAT-inclusive) turnover. The retained difference is the business's gain.

Eligibility: taxable turnover must be expected to be £150,000 or less (VAT-exclusive) in the next 12 months. You apply to join online via HMRC.

Flat rate percentages by sector (selected examples):

A 1% reduction applies in the first year of VAT registration. The FRS does not allow reclaiming input VAT on purchases (except for capital items costing over £2,000 including VAT, where a separate input VAT reclaim is permitted).

Limited Cost Trader Rule (16.5%)

From 1 April 2017, businesses on the FRS that spend less than 2% of their gross turnover on goods (or less than £1,000 per year if that is greater) are classified as "limited cost traders" and must use a 16.5% flat rate.

For this purpose, goods means physical goods used by the business -- stationery, postage, computer equipment actually consumed in the business. It excludes: services (internet, phone, software subscriptions, accountancy); food; vehicles and vehicle-related costs; capital goods; goods for resale if the business is not primarily a retailer.

For most service businesses (IT contractors, consultants, marketers, coaches) the goods spend is well below 2%, making them limited cost traders. At 16.5%, the FRS retention on a £100,000 gross turnover is (20% - 16.5%) x £100,000 = £3,500 -- but the business cannot reclaim input VAT on costs. Standard accounting allowing input VAT reclaims on subscriptions, equipment and services almost always produces a better outcome for limited cost traders. Check annually.

Cash Accounting Scheme (CAS)

The Cash Accounting Scheme allows businesses to account for VAT based on cash received and paid rather than invoices issued. The main advantages:

• Cash flow: you pay output VAT only when customers pay, not when you raise the invoice. A 30-day invoice is not paid until VAT period 2, so the VAT is not due until then.
• Bad debt relief: automatic -- if a customer never pays, you never paid the VAT and no bad debt relief claim is needed.
• Input VAT: reclaimed when you pay your suppliers, not when their invoice is received.

Eligibility: expected VAT taxable turnover of £1.35 million or less in the next 12 months. You must leave when turnover exceeds £1.6 million. CAS is particularly valuable for businesses with slow-paying B2B customers (30/60/90 day terms) or where bad debts are a risk.

Annual Accounting Scheme (AAS)

The Annual Accounting Scheme reduces VAT filing from four quarterly returns to a single annual return, with interim payments during the year:

• Nine interim payments: equal instalments paid in months 4 to 12 of the year (based on the prior year's liability). A balancing payment (or refund) is made with the annual return.
• Annual return deadline: 2 months after the end of the annual VAT period.
• New businesses: can use estimated payments in the first year.

AAS reduces administration significantly for small businesses with stable VAT liabilities. The main disadvantage is that refunds (for businesses regularly in a repayment position) are slower -- you must wait for the annual return rather than receiving a quarterly repayment. AAS is best suited to businesses that consistently owe VAT to HMRC rather than receiving regular repayments.

Combining Schemes

The FRS and AAS can be used together -- the business uses the flat rate percentage but files one return per year. This is the lowest-administration option for a small service business within the FRS threshold. CAS cannot be combined with FRS (FRS has its own cash-basis treatment). CAS and AAS can technically be combined but this is rare and administratively complex. Key combinations:

Making Tax Digital for VAT

Making Tax Digital (MTD) for VAT is mandatory for all VAT-registered businesses regardless of turnover. You must:

• Keep digital records of VAT transactions in compatible software (Xero, QuickBooks, Sage, FreeAgent, etc.).
• Submit VAT returns directly from compatible software -- manual entry via the HMRC portal is no longer permitted.
• Maintain a digital audit trail from source records to the VAT return (digital links between records).

All three VAT schemes (FRS, CAS, AAS) are fully compatible with MTD requirements. MTD-compatible software automatically produces the required nine VAT boxes from your digital records. Most small business accounting packages now include MTD-compliant VAT filing at no additional cost.

Worked Comparison: FRS vs Standard Accounting

IT consultant, 2026/27. Annual fee income (net of VAT) £120,000. VAT-bearing business costs (software, equipment, training): £3,000 net of VAT (input VAT £600). IT consultancy flat rate: 14.5%. Is the consultant a limited cost trader?

• Gross (VAT-inclusive) turnover: £120,000 x 1.20 = £144,000
• Goods spend (equipment, not software): £500 (below 2% of £144,000 = £2,880, and below £1,000)
• Limited cost trader: yes -- must use 16.5% flat rate

FRS at 16.5%: VAT paid to HMRC = £144,000 x 16.5% = £23,760. VAT collected from clients = £144,000 - £120,000 = £24,000. Net retention: £240. No input VAT reclaimed.

Standard accounting: Output VAT = £24,000. Input VAT reclaimed = £600 (on £3,000 costs). Net VAT due = £23,400. Net saving vs FRS: £360.

Standard accounting saves the consultant £360 per year and requires no more effort than FRS with MTD-compatible software. This consultant should leave (or not join) the FRS. The result reverses for a retailer with high goods purchases -- recalculate annually based on actual costs.