Who can use the Flat Rate Scheme?

Businesses with VAT-taxable turnover under £150,000, unless excluded categories.

What is a limited cost trader?

If your goods cost less than 2% of turnover or under £1,000/year, you pay 16.5% flat rate.

Can I reclaim VAT on purchases?

Generally no, except capital assets over £2,000 including VAT.

Is the first year discount still available?

Yes, 1% discount in your first year of VAT registration.

When should I leave the Flat Rate Scheme?

When turnover exceeds £230,000, or if standard VAT accounting is more beneficial.

VAT2026/27

What is VAT Flat Rate Scheme? UK Definition 2026/27

Written by Waqas Sagar ACA, FCCA, FMAAT

•

Verified by ICAEW, ACCA & AAT

•Updated April 2026

Quick Answer

Simplified VAT where you pay a fixed percentage of turnover, keeping the difference.

Definition of VAT Flat Rate Scheme

The VAT Flat Rate Scheme simplifies VAT accounting by letting businesses pay a fixed percentage of their gross turnover instead of tracking input and output VAT. The percentage depends on your industry sector (5.5%-16.5%). Its available to businesses with VAT-taxable turnover under £150,000. Limited cost traders pay 16.5%.

VAT Flat Rate Scheme — Key Facts for 2026/27

Turnover limit	£150,000
Rate range	5.5%-16.5%
Limited cost	16.5% rate
First year discount	1% reduction

How VAT Flat Rate Scheme Works — Example

Flat Rate Scheme profit

1Gross turnover (inc VAT): £60,000
2IT consultancy rate: 14.5%
3VAT payable: £8,700
4If standard VAT: Collected £10,000, reclaimed £2,000
5Net same: £8,000, but simpler with FRS

How VAT Flat Rate Scheme Affects Your Tax

The Flat Rate Scheme simplifies VAT admin but may not save money. Limited cost trader rules reduced its benefit for many. Calculate both methods to see which works better for your business.

Official HMRC Guidance on VAT Flat Rate Scheme

For official guidance, refer to HMRC's documentation. Tax rules can change, so always verify current rates and thresholds on gov.uk.

HMRC: VAT Flat Rate Scheme

Frequently Asked Questions about VAT Flat Rate Scheme

Related Tax Terms

VAT

Value Added Tax charged at 20% on most goods and services.

Accuracy Note

This information is for guidance only and is based on 2026/27 tax year rates. Tax rules are complex and your circumstances may differ. For personal advice, consult a qualified accountant or tax adviser.