The VAT Flat Rate Scheme lets eligible small businesses pay a fixed percentage of turnover to HMRC instead of tracking VAT on every transaction. This guide covers eligibility, the limited cost trader rule, and a worked example.
Published July 2026 · Updated July 2026
The Flat Rate Scheme simplifies VAT for small businesses. You still charge customers the normal 20%, but instead of adding up all your input and output VAT, you pay HMRC a single flat percentage of your gross (VAT inclusive) takings and keep the difference.
You can apply to join if you expect your VAT taxable turnover (excluding VAT) to be £150,000 or less in the next 12 months. You apply when registering for VAT or through your HMRC account.
If you spend very little on goods (less than 2% of turnover, or less than £1,000 a year), you are a 'limited cost trader' and must use a flat rate of 16.5% regardless of your sector. This mainly affects service businesses with few physical costs.
All new joiners get a 1% discount in their first year of registration.
You must leave the scheme if your total VAT inclusive turnover exceeds £230,000 in any rolling 12 month period, or if you expect it to.
A limited cost trader with £60,000 of gross takings (inc. VAT), in their first year:
Not necessarily. It saves admin, but if you buy a lot of VATable goods you might reclaim more under standard VAT. It is worth comparing both before deciding.
Generally no, except on certain capital assets costing £2,000 or more including VAT.
It depends on your trade sector, unless you are a limited cost trader, in which case it is 16.5%. HMRC publishes the sector rates in VAT Notice 733.
Source: GOV.UK (VAT Notice 733) ↗. This glossary is written for small business owners, so definitions are simplified. Tax rates and thresholds reflect 2026/27 UK rules and change over time. Berified does not provide accounting, tax or legal advice; always check the source or a qualified adviser.