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Home › Tax glossary › VAT Flat Rate Scheme
UK tax glossaryUpdated October 2026What is the VAT Flat Rate Scheme?
A plain-English explanation from Cangaf's ACCA-qualified accountants, with the 2026/27 rules.
VAT Flat Rate Scheme in briefThe VAT Flat Rate Scheme lets small VAT-registered businesses pay a fixed percentage of their VAT-inclusive turnover to HMRC instead of working out VAT on every sale and purchase. You can join if your taxable turnover is £150,000 or less excluding VAT, and the rate depends on your trade, such as 12.5% for catering.
Key facts
| Joining limit | Taxable turnover of £150,000 or less, excluding VAT |
| Leaving limit | Total income over £230,000 |
| First-year discount | 1% off your flat rate in your first year of VAT registration |
| Limited cost trader rate | 16.5% if you spend very little on goods |
How it works
You still charge 20% VAT on your invoices, but you pay HMRC a set percentage of your gross takings, including VAT. You generally can't reclaim VAT on purchases, except on capital assets costing £2,000 or more.
The limited cost trader rule
If your spending on goods is less than 2% of turnover or under £1,000 a year, you must use 16.5%. Most consultants and contractors fall into this, which usually makes the scheme poor value for them.
Who benefits most
Businesses with few VAT-able costs and a flat rate well below their actual VAT, such as many takeaways and some trades. We compare both methods on your real figures.
Common questions
Is the Flat Rate Scheme worth it?
It depends on your sector rate and costs. It often suits takeaways and some service businesses, but rarely suits limited cost traders, who pay 16.5%.
Can I reclaim VAT on purchases under the Flat Rate Scheme?
Generally no, except for capital assets costing £2,000 or more including VAT, such as equipment.
Can I leave the Flat Rate Scheme?
Yes, at any time, and you must leave if your income goes over £230,000. You can't rejoin for 12 months after leaving.
Official guidance: VAT Flat Rate Scheme (GOV.UK)
