The main VAT schemes for small UK businesses are standard VAT accounting, the Flat Rate Scheme, the Cash Accounting Scheme and the Annual Accounting Scheme. You can join the Flat Rate Scheme if your VAT taxable turnover is £150,000 or less, and the Cash Accounting and Annual Accounting schemes if it is £1.35 million or less. The right choice depends on your margins, how quickly customers pay you and how much VAT you pay on costs.

Choosing between VAT schemes well can save a small business hundreds or thousands of pounds a year, or ease cash flow. Choosing badly can mean paying more VAT than you need to. This guide compares the four VAT schemes side by side for 2026/27, with the thresholds, pros and cons, and a worked example for a Bolton business.

VAT schemes compared at a glance

Scheme	Join if turnover is	Must leave if turnover exceeds	Best for
Standard accounting	Any	Not applicable	Businesses with high VAT costs or that reclaim VAT regularly
Flat Rate Scheme	£150,000 or less (excluding VAT)	£230,000 (including VAT)	Low-cost service businesses with simple records
Cash Accounting Scheme	£1.35 million or less	£1.6 million	Businesses whose customers pay late
Annual Accounting Scheme	£1.35 million or less	£1.6 million	Businesses wanting one return a year and predictable payments

None of these VAT schemes apply until you are registered. You only need to register for VAT once your taxable turnover passes £90,000 in any rolling 12 months. Our guide to VAT registration explains when and how to register.

Standard VAT accounting

Standard accounting is the default that applies unless you join one of the other VAT schemes. Under standard accounting, you charge VAT on your sales, reclaim VAT on your business purchases and pay HMRC the difference each quarter. VAT is due on the date of the invoice, whether or not the customer has paid.

Pros:

• You reclaim all the VAT on your costs, which suits businesses buying a lot of stock, materials or equipment.
• It is the most flexible and works with every type of supply.

Cons:

• You may pay VAT to HMRC before your customer pays you.
• You must record VAT on every purchase invoice.

The Flat Rate Scheme

On the Flat Rate Scheme, you pay HMRC a fixed percentage of your VAT-inclusive turnover. You still charge customers 20% VAT, but you do not reclaim VAT on purchases, except on single capital items costing £2,000 or more including VAT. Our glossary entry on the VAT Flat Rate Scheme has a short summary.

The percentage depends on your trade. Some examples:

Business type	Flat rate
Retailing food, confectionery, tobacco, newspapers or children’s clothing	4%
Retailing not listed elsewhere	7.5%
General building or construction services	9.5%
Transport or storage, including couriers and taxis	10%
Catering, including restaurants and takeaways	12.5%
Hairdressing or other beauty treatment services	13%
Management consultancy	14%
Computer and IT consultancy, or accountancy	14.5%
Limited cost business	16.5%

You get a 1% reduction in your flat rate in your first year of VAT registration.

The limited cost business rule

If you spend less than 2% of your VAT-inclusive turnover on goods, or more than 2% but less than £1,000 a year, you are a limited cost business and must use 16.5%. Services, capital items, food or drink for you or your staff, and vehicle costs including fuel (unless you are a transport business) do not count as goods. Many consultants, IT contractors and other office-based businesses fall into this category, which often makes the Flat Rate Scheme worse than standard accounting.

Pros: simple records, and a real saving for businesses with low VAT costs and a rate well below 16.5%.

Cons: unlike the other VAT schemes, you lose the reclaim on most purchases, the limited cost rate hits many service businesses, and you cannot use it alongside the Cash Accounting Scheme.

The Cash Accounting Scheme

Under cash accounting, you pay VAT on sales only when your customer pays you, and reclaim VAT on purchases only when you have paid your supplier. You can join if your VAT taxable turnover is £1.35 million or less, and you must leave once it goes above £1.6 million.

Pros:

• Automatic bad debt relief, because you never pay VAT on an invoice that is not paid.
• Better cash flow if customers take 30, 60 or 90 days to pay.

Cons:

• You reclaim VAT on purchases later, so it does not suit businesses that buy on credit and get paid quickly.
• Some transactions must still use standard accounting, such as hire purchase, invoices raised in advance and invoices with payment terms of six months or more.
• You cannot use it with the Flat Rate Scheme, or if you are behind with VAT returns or payments.

The Annual Accounting Scheme

With annual accounting, you file one VAT return a year instead of four, and pay VAT in advance instalments based on your previous year’s liability, or an estimate if you are new to VAT. You can join if your estimated VAT taxable turnover is £1.35 million or less, and must leave if it is likely to be more than £1.6 million at the end of the year.

	Monthly instalments	Quarterly instalments
Number of payments	9, at the end of months 4 to 12	3, at the end of months 4, 7 and 10
Each payment	10% of the estimated VAT bill	25% of the estimated VAT bill
Balancing payment and return	Due 2 months after the year end	Due 2 months after the year end

Pros: one return a year, the least admin of the VAT schemes, predictable payments for budgeting, and it can be combined with the Flat Rate Scheme or cash accounting.

Cons: if your turnover falls, you may be overpaying until the year end, and if it rises sharply you face a large balancing payment. Repayment businesses get refunds only once a year.

Whichever of the VAT schemes you choose, returns must be filed through software that complies with Making Tax Digital.

Worked example: comparing VAT schemes for two Bolton businesses

Darren is a painter and decorator in Bolton working for homeowners. He has sales of £120,000 before VAT and spends £40,000 plus VAT on paint, materials and hire, so he is not a limited cost business and uses the 9.5% general building rate.

Priya runs an IT consultancy from Bury with sales of £100,000 before VAT and only £5,000 plus VAT of costs, almost all services. She is a limited cost business.

	Darren (decorator)	Priya (IT consultant)
Sales including VAT	£144,000	£120,000
VAT payable under standard accounting	£16,000	£19,000
VAT payable on the Flat Rate Scheme	£13,680 (9.5%)	£19,800 (16.5%)
Better choice	Flat Rate Scheme, saving £2,320	Standard accounting, saving £800

In Darren’s first year of VAT registration, his rate would be 8.5%, cutting his flat rate bill to £12,240. Priya would pay more on the Flat Rate Scheme, so she should stay on standard accounting and could add cash accounting if her clients pay slowly.

These figures are illustrative for 2026/27 and ignore income tax. You can check VAT on individual amounts with our VAT calculator.

How to choose between VAT schemes

Ask yourself these questions:

1. How much VAT do you pay on costs? If it is high, standard accounting usually wins.
2. Are you a limited cost business? If so, the Flat Rate Scheme rarely helps.
3. Do customers pay late? If so, cash accounting protects your cash flow.
4. Do you struggle with quarterly deadlines? Annual accounting reduces returns to one a year, but you still make regular payments. Late payments can lead to penalties, as our article on VAT late payment penalties explains.

You can review your choice of VAT schemes each year as the business changes. You must leave the Flat Rate Scheme if your income passes £230,000, and once you leave you cannot rejoin for 12 months.

Frequently asked questions

Get advice on your VAT scheme

Picking the wrong VAT scheme is one of the most common and costly mistakes we see. Cangaf’s ACCA-qualified team in Bolton compares the available VAT schemes against your real figures, registers you on the best one and files your VAT returns on time through MTD-compatible cloud accounting software. Get a fixed-fee quote today.

Official guidance: VAT Flat Rate Scheme, Flat Rate Scheme for small businesses (VAT Notice 733), VAT Cash Accounting Scheme and VAT Annual Accounting Scheme.

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