VAT flat rate scheme: Simplify VAT for your small business

Published Friday 14 November 2025

Table of contents

• What is the VAT Flat Rate Scheme?
• VAT flat rate percentages and industry rates
• Advantages of the VAT Flat Rate Scheme
• Eligibility for the VAT Flat Rate Scheme
• Applying for the VAT Flat Rate Scheme
• VAT Flat Rate Scheme: Important points to consider
• Managing your VAT with the right tools
• FAQs on the VAT Flat Rate Scheme

Key takeaways

• Apply for the VAT Flat Rate Scheme if your annual turnover is £150,000 or less (excluding VAT) to simplify your VAT calculations by paying a fixed percentage of total sales instead of tracking individual transactions.

• Calculate your VAT payment by finding your industry's specific flat rate percentage from HMRC's official list and applying it to your total sales including VAT, with new businesses receiving a 1% discount in their first year.

• Recognize that you cannot reclaim VAT on most business purchases under this scheme (except capital assets over £2,000), making it most beneficial for service businesses with low purchase costs.

• Monitor your turnover carefully as you must leave the scheme if your annual turnover exceeds £230,000, and businesses spending less than 2% of turnover on goods must use the higher 16.5% limited cost rate regardless of industry.

What is the VAT Flat Rate Scheme?

Standard VAT accounting requires you to subtract VAT paid on purchases from VAT collected on sales to calculate what you owe HMRC.

The Flat Rate Scheme simplifies this process. Instead of complex calculations, you pay a fixed percentage of your total sales (including VAT) to HMRC.

Key requirements:

• Register your business for VAT
• Keep your annual turnover at £150,000 or less (excluding VAT)

Main benefits:

• Save time on admin by not tracking VAT on every purchase and sale
• Keep the difference between what you charge customers and what you pay HMRC
• Budget more easily with a fixed percentage

Limitation: You can only reclaim VAT on capital assets over £2,000.

VAT Flat Rate Scheme vs. standard VAT accounting

Standard VAT accounting vs flat rate scheme – here’s how they differ:

Standard VAT accounting:

• Track VAT on every sale and purchase
• Subtract VAT paid from VAT charged each quarter
• Keep detailed records of all transactions
• Reclaim VAT on all business purchases

Flat Rate Scheme:

• Track only your total sales figures
• Apply a fixed percentage to your total turnover
• Use one rate regardless of individual transactions
• Note that you cannot reclaim VAT on most purchases

The right choice depends on . Service businesses with low costs often benefit most from the Flat Rate Scheme.

For example, if you run an advertising business, your flat rate is 11%. You pay HMRC 11% of your total sales, including VAT, for that period. You do not need to calculate VAT paid or charged to work out your VAT bill.

How does the VAT Flat Rate Scheme work?

How the calculation works

• Step 1: Find your industry rate from HMRC's official list
• Step 2: Apply this percentage to your total sales (including VAT)
• Step 3: Pay this amount to HMRC quarterly

Example calculation:

• Sale: £2,000 + £400 VAT = £2,400 total
• Flat rate: 11% (advertising industry)
• Payment to HMRC: £2,400 × 11% = £264

Special rates:

• Get a 1% discount in your first year of VAT registration if you are a new business
• Use a fixed 16.5% rate if you are a limited cost business, regardless of your industry

Limited cost business definition:

You are a limited cost business if you spend less than 2% of your VAT flat rate turnover on relevant goods (including VAT), or if you spend more than 2% but still less than £1,000 per year.

VAT flat rate percentages and industry rates

Here are common VAT flat rate percentages along with their industry rates.

Standard industry rates

HMRC provides a list of flat rate percentages for different business types. Choose the category that best describes your business. Using the wrong rate can mean you pay the wrong amount of VAT. Ask your accountant if you are unsure which rate applies to your business.

Limited cost businesses and the 16.5% rate

If your business has very low costs, you may be classed as a limited cost business. This applies if your spending on goods (not services) is either less than 2% of your turnover, or less than £1,000 a year. If you fall into this category, you must use the flat rate of 16.5%, regardless of your industry.

First-year discount for new VAT registrations

New businesses get a 1% discount on their flat rate percentage in the first year. For example, if your flat rate is 11%, you pay 10% for the first 12 months.

Advantages of the VAT Flat Rate Scheme

The flat rate scheme offers 3 main advantages.

1. Simplified admin

• Apply one percentage to your total sales
• Track only your sales, not individual VAT transactions
• Spend less time on quarterly VAT returns

2. Potential cash flow benefits

• Keep the difference between the VAT you charge customers and what you pay HMRC
• Benefit from improved cash flow if your costs are low

3. Predictable costs

• Fixed percentage: Same rate every quarter regardless of purchases
• Easier budgeting: Know exactly what you'll pay HMRC

Consideration: The flat rate scheme works best if your business has low purchase costs. If you regularly buy expensive equipment or materials, standard VAT accounting may be better for you.

Eligibility for the VAT Flat Rate Scheme

Here are common eligibility requirements for the VAT Flat Rate Scheme:

Basic criteria:

• Register for VAT
• Keep your annual turnover at £150,000 or less (excluding VAT)
• Include all sales except VAT-exempt items

Key restrictions:

• Wait 12 months before rejoining if you leave the scheme
• Leave the scheme if your annual turnover exceeds £230,000, unless HMRC agrees you will not exceed £191,500 in the next 12 months
• Avoid using specialist schemes alongside the flat rate scheme

VAT taxable turnover explained: This includes all your business sales and services, but excludes VAT-exempt items such as insurance or education services.

Check out the full list of HMRC VAT Flat Rate Scheme exceptions.

Applying for the VAT Flat Rate Scheme

You can join the VAT Flat Rate Scheme online when you first register for VAT. Or fill in the VAT600 FRS form and send it by email or post.

• Via email: frsapplications.vrs@hmrc.gov.uk
• Via post: BT VAT HM Revenue and Customs BX9 1WR

Provide your business name, contact number, and other details. Identify your correct flat rate percentage before you fill out the VAT600 FRS, as you need to include it on your application.

VAT Flat Rate Scheme: Important points to consider

Before you apply for the HMRC Flat Rate Scheme, consider the following points.

• Flat Rate Scheme percentages apply to most exempt income, as well as zero-rated and reduced-rated supplies. You can see everything you need to include in your flat rate turnover on the HMRC website
• You might pay more VAT on the Flat Rate Scheme if your expenditure on zero-rated and reduced-rated supplies is higher than the industry average
• Consider the balance of VAT charged and VAT paid on purchases in your business. High costs might mean that the VAT you can claim back is more valuable than the difference between VAT you charge and what you pay HMRC on the Flat Rate Scheme
• You will cease to be eligible for the VAT Flat Rate Scheme if your taxable turnover rises above £230,000 after joining the scheme. If your business is growing fast, you may need to leave the scheme soon after joining it, which impacts your record keeping and VAT return process. In this scenario, standard VAT accounting may be more practical. If you are unsure which would be most beneficial, speak to your accountant

Managing your VAT with the right tools

Whichever VAT scheme you choose, keeping accurate records is essential, especially with Making Tax Digital (MTD) rules. Using the right tools makes VAT less of a chore and helps you stay compliant.

Accounting software helps you keep accurate digital records, calculate what you owe, and submit returns directly to HMRC. With everything in one place, you can spend less time on admin and more time on what you do best – running your business. See how you can try Xero accounting software for free to simplify your VAT.

FAQs on the VAT Flat Rate Scheme

Here are answers to some common questions about the VAT Flat Rate Scheme.

What is the limit for flat rate VAT?

VAT-registered businesses that expect to earn £150,000 in taxable turnover or less (excluding VAT) are eligible to apply. Businesses must leave the scheme if their taxable turnover for the year is more than £230,000.

Is it better to be on a flat rate?

Here are the pros and cons of the Flat Rate Scheme.

Pros

• Simplify your record keeping for VAT returns
• Avoid complex calculations to work out what you owe or are owed
• Keep the difference between VAT charged to customers and what you pay HMRC

Cons

• You cannot claim VAT back on business purchases
• You must change how you calculate VAT if your income exceeds £230,000 and you leave the scheme
• You may find it difficult to choose the right industry rate, and HMRC may challenge your choice

How does the 16.5% limited cost rate work?

You must use the 16.5% rate if you spend less than 2% of your turnover or under £1,000 per year on goods. This rate often makes the scheme less beneficial for service-based businesses.

Can I change my VAT flat rate percentage after joining?

Change your flat rate percentage if your main business activity changes. Review your rate each year and inform HMRC of any changes.

How do I deal with record keeping and proof of expenses?

You must keep accurate records, whether or not you use the VAT Flat Rate Scheme. Making Tax Digital requires digital record keeping. Cloud-based software such as Xero accounting software gives you a safe place to record and store your records.