Last reviewed: 29 September 2026 · Reviewed by IFM's qualified accountant
The Flat Rate Scheme is an administrative method, not a reduced customer VAT rate. The business still charges customers the normal VAT rate for each supply and issues ordinary VAT invoices.
What should you know about eligibility in 2026/27?
A business can generally join where expected VAT-exclusive taxable turnover for the next 12 months is £150,000 or less. It must normally leave when VAT-inclusive total income exceeds £230,000 under the anniversary or 30-day tests, subject to detailed exceptions.
Those figures apply in 2026/27 and are scheme thresholds, not the £90,000 compulsory VAT-registration threshold. A voluntarily registered business below £90,000 can still consider the scheme.
Businesses connected with another, using certain margin schemes or involved in specified avoidance or recent scheme history can be excluded. Check VAT Notice 733 before applying.
What should you know about standard VAT accounting?
Under the standard method, the business records VAT charged on taxable sales and eligible VAT paid on purchases. The return pays or reclaims the difference, with partial-exemption, business-use and blocked-input rules applied.
This can suit businesses with significant VAT-bearing costs, capital expenditure or zero-rated sales. It requires good purchase invoices and accurate coding.
Input VAT is not automatically recoverable merely because the company paid the bill. The supply must be to the registered business for its business activity, supported by valid evidence and not blocked or restricted.
What should you know about flat Rate Scheme calculation?
For 2026/27, the business applies its flat-rate percentage to VAT-inclusive turnover. Percentages depend on trade sector. For example, the published accountancy or bookkeeping rate is 14.5%, but a business must choose the category that best describes its own activity.
The result paid to HMRC can be less or more than the VAT charged to customers. The difference is not a separate VAT reclaim; it forms part of the business's accounting result and taxable profit calculation.
The scheme simplifies routine input-VAT tracking, but records and invoices are still required. The business must classify supplies, complete returns and retain a VAT account.
What should you know about limited-cost businesses?
For 2026/27, a limited-cost business uses a 16.5% flat rate. The test applies each VAT period where relevant goods cost less than 2% of VAT-inclusive turnover, or less than £1,000 a year where the 2% amount is greater. For a quarterly period the annual £1,000 comparison is apportioned.
“Goods” is narrow. Services, rent, accountancy, advertising, software, capital expenditure and many vehicle or food costs do not count. A consultancy buying little physical stock can therefore fall into the 16.5% rate even if it has substantial operating expenses.
At 16.5% of VAT-inclusive turnover, the scheme often leaves little difference from output VAT charged at 20%. Calculate with actual expected costs rather than assuming “flat rate” means lower tax.
What should you know about first-year discount?
A business in its first year of VAT registration can reduce the applicable flat-rate percentage by 1 percentage point for 12 months from the effective VAT-registration date. The period is tied to registration, not necessarily the date it joins the scheme.
For 2026/27 planning, check how much of that 12-month window remains. A late scheme application does not restart the discount.
The discount also applies to the 16.5% limited-cost rate where conditions are met, reducing it to 15.5% during the eligible period.
What should you know about capital assets?
For 2026/27, flat-rate businesses can reclaim input VAT on a single purchase of capital expenditure goods costing £2,000 or more including VAT, subject to conditions. The rule does not cover a bundle of separate purchases artificially combined, services or many mixed supplies.
If the asset is later sold, output VAT and scheme treatment require review. Capital Goods Scheme assets can make a business ineligible or create adjustments.
Large planned investment is a reason to compare the schemes before purchase.
What should you know about comparing the numbers?
Build a 12-month model with VAT-exclusive sales by rate, VAT-inclusive turnover for the flat-rate calculation, sector percentage, limited-cost status, first-year discount, recoverable purchase VAT under standard accounting and eligible capital-goods claims.
Include seasonal quarters. Limited-cost status is tested by period, so one annual average can conceal a high-rate quarter.
Also model Corporation Tax or Income Tax treatment of the flat-rate surplus or cost. Do not compare only the cash paid on VAT returns.
What should you know about administration and cash flow?
Standard accounting demands detailed input-VAT records but gives transparent purchase recovery. Flat rate can simplify routine coding yet still needs turnover classification and goods tests.
Cash Accounting and Annual Accounting are separate VAT schemes and can sometimes be combined with flat rate under conditions. Do not assume choosing flat rate determines invoice or payment timing automatically.
Whichever method applies, ring-fence VAT cash and reconcile every return.
What should you know about leaving or changing?
A business can leave voluntarily or must leave when it becomes ineligible. The effective date, stock and asset position and later re-entry restrictions require planning.
Do not switch retrospectively after seeing which method would have produced less VAT. Apply through the correct process and use the approved date.
Review the scheme annually and when prices, sector, goods costs or investment changes.
What should you know about make a documented decision?
Retain the forecast, sector rationale, limited-cost calculation, join date and first-year discount end. Review actual results against the model after each of the first four returns.
See VAT support for the relevant service page. Use the Deadline Finder for standard first accounts, first confirmation statement and Corporation Tax dates. For VAT, payroll, personal tax and other obligations, check the tax deadlines calendar and your official records.
What should you know about example comparison method?
Take one representative quarter and calculate output VAT and recoverable input VAT under standard accounting. Then calculate the relevant flat-rate percentage on VAT-inclusive turnover and add any permitted capital-goods recovery.
Repeat for a high-cost and low-cost quarter. Apply the limited-cost test separately to each period and show the first-year discount only for dates within its 12-month window.
Reconcile both calculations to the same sales and purchases. A comparison that includes input VAT in one method but ignores VAT-inclusive turnover in the other is unreliable.
What should you know about questions before joining?
Confirm the dominant business activity, connected businesses, expected turnover, relevant goods and planned capital purchases. Check whether partial exemption, margin schemes or international supplies complicate eligibility.
Agree the start date and document HMRC approval or application. Configure software so customer invoices still use normal VAT rates and the return uses the scheme calculation.
Review after each quarter. A sector, cost profile or turnover change can reverse the original result.
What should you know about errors to avoid?
Do not apply the flat-rate percentage to VAT-exclusive sales. Do not reclaim routine purchase VAT as though standard accounting still applied.
Do not count services as goods in the limited-cost test or select a favourable trade category that does not match the main activity. Retain invoices for relevant goods and the calculation for each period.
Do not confuse the 1% reduction with a discount from the customer VAT rate. It reduces the scheme percentage for the eligible registration year only.
What should you know about accounting entries?
Record gross customer invoices, output VAT and the flat-rate liability so the accounts show the scheme surplus or cost consistently. Reconcile the VAT control account to the submitted return.
Corporation Tax or Income Tax accounts treatment follows the business's accounting basis and the VAT scheme. Ensure the year-end accounts do not double count sales VAT or purchase costs.
What should you know about exit planning?
Before leaving, confirm the effective date, return periods, stock, capital assets and future input-VAT method. Update software from the first standard-accounting period and train the person coding purchases.
Keep the notice and calculations. A later HMRC review should be able to see why the business joined, remained eligible and left.
What should you read next?
Use the Deadline Finder for standard first accounts, first confirmation statement and Corporation Tax dates. For VAT, payroll, personal tax and other obligations, check the tax deadlines calendar and your official records.
What do people also ask about this topic?
What should you know about eligibility in 2026/27?
A business can generally join where expected VAT-exclusive taxable turnover for the next 12 months is £150,000 or less. It must normally leave when VAT-inclusive total income exceeds £230,000 under the anniversary or 30-day tests, subject to detailed exceptions.
What should you know about standard VAT accounting?
Under the standard method, the business records VAT charged on taxable sales and eligible VAT paid on purchases. The return pays or reclaims the difference, with partial-exemption, business-use and blocked-input rules applied.
What should you know about flat Rate Scheme calculation?
For 2026/27, the business applies its flat-rate percentage to VAT-inclusive turnover. Percentages depend on trade sector. For example, the published accountancy or bookkeeping rate is 14. 5%, but a business must choose the category that best describes its own activity.
What should you know about limited-cost businesses?
For 2026/27, a limited-cost business uses a 16. 5% flat rate. The test applies each VAT period where relevant goods cost less than 2% of VAT-inclusive turnover, or less than £1,000 a year where the 2% amount is greater. For a quarterly period the annual £1,000 comparison is apportioned.
Which official sources support this guide?
- https://www.gov.uk/vat-flat-rate-scheme
- https://www.gov.uk/vat-flat-rate-scheme/how-much-you-pay
- https://www.gov.uk/vat-flat-rate-scheme/join-or-leave-the-scheme
General guidance, not advice for your situation.
