Last updated: 14 October 2026
Should a new business use the VAT flat rate scheme?
It can save time and sometimes money, but often not. Under the flat rate scheme, you still charge customers 20% VAT, but you pay HMRC a fixed percentage of your VAT-inclusive turnover, set by your trade. New businesses get a 1% discount in their first year of VAT registration. However, if you spend less than 2% of turnover, or less than £1,000 a year, on goods, you must use the limited cost trader rate of 16.5%. That usually means you are better off on standard accounting.
Who can join
- Taxable turnover (excluding VAT) expected to be £150,000 or less in the next 12 months
- You must leave if your total income goes over £230,000
- You can’t join if you have left the scheme in the last 12 months or are connected with another business
How it works
- Charge VAT at the normal rate on your invoices
2. Multiply your gross (VAT-inclusive) turnover by your flat rate percentage
3. Pay that to HMRC
4. You can’t reclaim VAT on purchases, except on capital goods costing more than £2,000 including VAT
Example
A new marketing consultancy charges £60,000 plus £12,000 VAT, so gross turnover is £72,000. The flat rate for its trade is 12.5%, minus 1% in the first year, which is 11.5%. It pays £8,280 and keeps £3,720. If it spends less than 2% on goods, the 16.5% limited cost rate applies instead (15.5% with the first-year discount), so it pays £11,160 and keeps only £840. Under standard accounting, it would pay £12,000 minus its input VAT.
The limited cost trader test
You are a limited cost trader if your spending on goods in the period is either:
- less than 2% of your VAT-inclusive turnover, or
- more than 2% but less than £1,000 a year (£250 a quarter)
Services, rent, food and drink for you or your staff, vehicles and fuel don’t count as goods.
Pros and cons
| Pros | Cons |
| Simpler VAT returns | Most VAT on costs can’t be reclaimed |
| First-year 1% discount | Limited cost trader rate of 16.5% for many service businesses |
| Can keep some of the VAT charged | Not suitable if you make zero-rated or exempt sales |
When it works best
Businesses with low costs but high-percentage trades, such as some retailers, or businesses that buy enough goods to avoid the limited cost test.
Flat rate scheme mistakes
Businesses often apply the rate to their net turnover instead of their VAT-inclusive turnover, or forget to check the limited cost trader test each quarter. You can’t usually reclaim VAT on purchases, except for capital assets over £2,000. Review whether the scheme still saves money each year, and leave if it doesn’t. Check the scheme every quarter. Newly registered businesses get a 1% discount in their first year.
Frequently asked questions
Can I combine the flat rate scheme with annual accounting?
Yes.
Is the flat rate VAT taxable income?
Yes. The VAT you keep is part of your taxable profit.
Can I leave the scheme?
Yes, at any time, by telling HMRC.
Which percentage applies to me?
It depends on your main business activity. Check HMRC’s list.
Related: standard VAT accounting and how to register for VAT.
Talk to Accotax
Want this handled for you? Our team at Accotax can help with the VAT flat rate scheme. See our VAT accountants service, or contact us for a free, no-obligation quote.
This page is general guidance based on HMRC rules for the 2026/27 tax year, checked against gov.uk on 14 October 2026. It is not personal advice, so speak to an accountant about your own situation.
