VAT Flat Rate Scheme: how it works, rates, and eligibility

Published Tuesday 26 May 2026

Table of contents

• What is the VAT Flat Rate Scheme?
• VAT flat rate percentages and industry rates
• Advantages of the VAT Flat Rate Scheme
• When to avoid the VAT Flat Rate Scheme
• Eligibility for the VAT Flat Rate Scheme
• Who cannot join the VAT Flat Rate Scheme?
• Applying for the VAT Flat Rate Scheme
• Leaving the VAT Flat Rate Scheme
• Simplify your VAT with Xero
• FAQs on the VAT Flat Rate Scheme

Key takeaways

• The VAT Flat Rate Scheme (FRS) lets you pay a fixed percentage of your gross turnover to His Majesty's Revenue and Customs (HMRC) instead of calculating VAT on every purchase and sale, which saves time on admin.
• Your flat rate percentage depends on your industry, and new VAT-registered businesses get a 1% discount in their first year.
• The scheme works best for businesses with low costs; if you spend heavily on VAT-eligible goods, standard VAT accounting may save you more money.
• You can join the FRS if your VAT-taxable turnover is £150,000 or less (excluding VAT), and you must leave if it exceeds £230,000 (including VAT).

What is the VAT Flat Rate Scheme?

The VAT Flat Rate Scheme (FRS) is a simplified way to handle your VAT returns. Instead of recording VAT on every transaction, you pay HMRC a fixed percentage of your gross turnover.

HMRC introduced the scheme to reduce the admin burden on small businesses. It's designed to make VAT simpler, so you can spend less time on paperwork and more time running your business.

VAT Flat Rate Scheme vs. standard VAT accounting

With standard VAT accounting, you track the VAT you charge on sales (output VAT) and the VAT you pay on purchases (input VAT). You then pay the difference to HMRC, or claim a refund if your input VAT is higher. This means keeping detailed records of every transaction.

Under the FRS, you skip that detailed tracking. You apply a flat rate percentage to your gross turnover (including VAT). You then pay that amount to HMRC.

You still charge your customers the standard VAT rate, but you don't reclaim VAT on most purchases. The trade-off is simpler records in exchange for less flexibility on reclaiming input VAT.

How does the VAT Flat Rate Scheme work?

You charge VAT to your customers at the standard rate (currently 20%). You then calculate what you owe HMRC by applying your industry's flat rate percentage to your gross turnover.

Say your flat rate is 14.5% and you invoice a client £1,200 (£1,000 plus £200 VAT). You'd pay HMRC 14.5% of £1,200, which is £174. You keep the remaining £26 as extra income.

Over the course of a year, this difference can add up.

VAT flat rate percentages and industry rates

The percentage you pay under the FRS depends on your type of business. HMRC publishes a full list of flat rate percentages by trade sector, ranging from 4% to 16.5%.

Standard industry rates

Each trade sector has its own flat rate. Here are some common examples to give you an idea of the range.

• Retailing of food, confectionery, tobacco, newspapers, or children's clothing: 4%
• Computer and IT consultancy or data processing: 14.5%
• Management consultancy: 14%
• Hairdressing and other beauty treatments: 13%
• Journalism and photography: 11%
• Pubs: 6.5%

Check the full list on the HMRC website to find the rate that matches your business activity. If your business spans multiple sectors, you use the rate for whichever sector generates the most turnover.

Limited cost businesses and the 16.5% rate

If your business spends a small amount on goods, HMRC may classify you as a 'limited cost business'. This applies if your spending on relevant goods is less than 2% of your gross turnover. It also applies if that spending falls below £1,000 per year, even when your costs are above 2%. Relevant goods exclude capital expenditure, food and drink, and vehicles.

Limited cost businesses must use a flat rate of 16.5%, regardless of their trade sector. HMRC introduced this rate in April 2017. It significantly reduced the financial benefit of the FRS for many service-based businesses.

First-year discount for new VAT registrations

If you're in your first year of VAT registration, you get a 1% discount on your flat rate percentage. For example, if your industry rate is 14.5%, you'd pay 13.5% in year 1. This discount applies for the first 12 months from the date of your VAT registration, not from when you join the FRS.

Advantages of the VAT Flat Rate Scheme

The FRS isn't right for every business, but it offers clear benefits for those it suits. HMRC-commissioned research found 2 main reasons businesses use the Flat Rate Scheme: simpler VAT admin and a financial advantage.

1. Simplified admin

You don't need to record the VAT you pay on every purchase. This cuts down the time you spend on bookkeeping and reduces the chance of errors on your VAT return. For small businesses without a dedicated accounting function, this is a significant time-saver.

2. Potential cash flow benefits

If your flat rate percentage is lower than the effective rate you'd pay under standard VAT, you keep the difference. This creates a small but steady financial benefit each quarter. It's particularly useful for businesses with low material costs, such as consultancies or freelancers.

3. Predictable costs

With a fixed percentage, you always know roughly what your VAT bill will be. This makes it easier to plan your cash flow and avoid surprises at the end of each VAT quarter. You can budget with more confidence and focus on growing your business.

When to avoid the VAT Flat Rate Scheme

The FRS doesn't suit every business. In some situations, standard VAT accounting saves you more money or gives you more flexibility. An HMRC-commissioned study found that a reduction in financial advantage was the reason some businesses left the scheme.

Consider avoiding the FRS in these situations.

• Your business has high costs for VAT-eligible goods or materials, meaning you'd reclaim more under standard VAT accounting.
• You're classified as a limited cost business, which locks you into the 16.5% rate and removes most of the financial benefit.
• You make a significant proportion of zero-rated or exempt sales, since the flat rate still applies to your full gross turnover.
• Your turnover is approaching the £230,000 exit threshold, which means you may need to switch schemes soon anyway.
• You regularly buy capital goods worth £2,000 or more (including VAT), since these are one of the few categories where you can still reclaim VAT under the FRS.

If you're unsure, compare your VAT position under both methods for a recent quarter. This gives you a clear picture of which approach works best for your business.

Eligibility for the VAT Flat Rate Scheme

To join the FRS, you need to meet HMRC's eligibility criteria. The main requirement is that your VAT-taxable turnover (excluding VAT) must be £150,000 or less in the next 12 months.

You must also meet the following conditions to be eligible.

• You must be registered for VAT, or be applying for VAT registration at the same time.
• Your business must be based in the UK.
• You must not have left the FRS in the previous 12 months.
• You must not have committed a VAT offence in the previous 12 months, such as a penalty for VAT evasion.
• You must not be connected to another business already on the FRS. This applies unless your combined turnover is within the threshold.

Who cannot join the VAT Flat Rate Scheme?

Certain businesses are excluded from the FRS entirely, regardless of turnover. HMRC has specific rules about which types of businesses cannot use the scheme.

You cannot join the FRS if any of the following apply.

• You've left the scheme within the last 12 months.
• You use the Cash Accounting Scheme and your turnover exceeds £1.35 million.
• You use the VAT Annual Accounting Scheme and your turnover exceeds £1.35 million.
• You're closely associated with another business already using the FRS, and your combined turnover exceeds the threshold.
• You're not registered for VAT, and you're not applying for registration.
• You've been convicted of a VAT offence or received a penalty for VAT evasion in the previous 12 months.

If you're unsure whether your business qualifies, check the full eligibility conditions on the HMRC website or speak to your accountant. You can also compare the FRS with other VAT accounting schemes to find the best fit.

Applying for the VAT Flat Rate Scheme

Joining the FRS is a straightforward process. You can apply online through your HMRC Government Gateway account, or by post using form VAT600FRS.

Follow these steps to apply.

1. Log in to your HMRC Government Gateway account

Access your account at the HMRC website. If you don't have a Government Gateway account, you'll need to create one first.

2. Go to your VAT account

Select the option to join the Flat Rate Scheme from your VAT account dashboard.

3. Provide your business details

Enter details about your business activity so HMRC can assign the correct flat rate percentage.

4. Confirm your expected turnover

Enter your expected VAT-taxable turnover for the next 12 months. This must be £150,000 or less (excluding VAT).

5. Submit your application

HMRC will confirm your start date and flat rate percentage.

If you're registering for VAT for the first time, you can apply for the FRS at the same time. HMRC typically processes applications within a few days.

Leaving the VAT Flat Rate Scheme

You can leave the FRS voluntarily at any time, but in some cases you're required to leave. Make sure you know when you must leave so you stay compliant.

You must leave the FRS if any of the following apply.

• Your total business income (including VAT) exceeds £230,000 in any 12-month period.
• HMRC notifies you that you're no longer eligible for the scheme.
• You're convicted of a VAT offence or receive a penalty for VAT evasion.

If you want to leave voluntarily, you can do so at the end of any VAT accounting period. Write to HMRC or use your Government Gateway account to notify them. You'll need to start using standard VAT accounting from the date you leave.

After leaving, you must wait at least 12 months before you can rejoin the scheme. Once you switch back to standard VAT accounting, you'll need to track input and output VAT on every transaction again.

Simplify your VAT with Xero

Whether you use the FRS or standard VAT accounting, keeping accurate records is essential. Making Tax Digital (MTD) for VAT is now mandatory for all VAT-registered businesses. You need MTD-compatible software to submit your VAT returns digitally.

HMRC-commissioned research found that businesses using the FRS benefited from MTD, with many reporting that digital tools made the scheme even simpler to manage.

Xero's cloud accounting software is HMRC-recognised for MTD for VAT. It automates bank reconciliation and tracks your transactions in real time. It also calculates your VAT return for you. You can submit your FRS or standard VAT return directly to HMRC from Xero. This saves time and reduces the risk of errors. Get one month free.

FAQs on the VAT Flat Rate Scheme

Here are some frequently asked questions about the VAT Flat Rate Scheme.

Can I reclaim VAT on purchases under the Flat Rate Scheme?

You generally cannot reclaim VAT on purchases under the FRS, except for capital goods worth £2,000 or more (including VAT). For most expenses, the flat rate already accounts for your input VAT.

Can sole traders use the VAT Flat Rate Scheme?

Yes. Sole traders can use the FRS as long as they meet the eligibility criteria. The same turnover thresholds and conditions apply whether you're a sole trader, partnership, or limited company.

What happens if I exceed the VAT Flat Rate Scheme turnover limit?

If your total business income (including VAT) exceeds £230,000 in any 12-month period, you must leave the scheme. You'll then need to switch to standard VAT accounting and begin tracking input and output VAT on all transactions.

How do I work out if I'm a limited cost business?

You're a limited cost business if your spending on relevant goods is less than 2% of your gross turnover, or below £1,000 per year. Relevant goods exclude capital expenditure, food and drink, and vehicle costs.

Can I use the Flat Rate Scheme with Making Tax Digital?

Yes. The FRS is fully compatible with MTD for VAT. You still need to keep digital records and submit your VAT return through MTD-compatible software, but the scheme simplifies what you need to record.

Do I need to tell my customers I'm on the Flat Rate Scheme?

No. You still charge VAT at the standard rate on your invoices, and the flat rate only affects how you calculate what you pay to HMRC.