What changes under the scheme
The scheme uses a fixed percentage of relevant VAT-inclusive turnover to work out a payment. It is distinct from the VAT rate charged to a customer. Joining generally requires expected VAT turnover of £150,000 or less excluding VAT, subject to HMRC’s other conditions.
Choose the applicable percentage
The business sector and limited cost business rules affect the percentage. A limited cost business generally uses 16.5%. Check the definition of relevant goods and the period being tested with HMRC; do not use total business expenses as a shortcut.
Build a comparison worksheet
Make one column for a flat rate estimate and another for normal accounting. Keep the same sales assumptions in both. Separately list purchases and their recoverability. Most input VAT is not separately recovered under the scheme, although qualifying capital expenditure exceptions exist.
Interpret the result
At an illustrative 12% rate, £6,000 VAT-inclusive turnover produces a £720 payment estimate. The £5,280 remaining is not profit. Confirm eligibility, the correct rate, applicable turnover and any adjustments before treating an estimate as a return figure.
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FAQs
How does the Flat Rate Scheme work?
Instead of paying VAT on sales minus VAT on purchases, you pay a fixed percentage of your gross (VAT-inclusive) turnover. You still charge customers VAT at the normal rates, but you keep the difference between what you charge and the flat rate you pay — in exchange for not reclaiming VAT on most purchases.
What rate will I pay?
The percentage depends on your business sector — for example, categories range from around 4% to 16.5%. If less than 2% of your turnover (or under £1,000 a year) goes on relevant goods, you are a 'limited cost business' and must use 16.5% regardless of sector.
Who can join the Flat Rate Scheme?
Your taxable turnover excluding VAT must be £150,000 or less in the next year to join. You must leave if your total business income including VAT exceeds £230,000 in a year.
Can I reclaim any VAT on the Flat Rate Scheme?
Generally no — the flat rate percentage already allows for the VAT on your day-to-day purchases. The exception is capital expenditure goods costing £2,000 or more including VAT, where the VAT can be reclaimed separately.
Is there a discount in the first year?
Yes. If you are newly VAT-registered, you get a 1% reduction in your flat rate percentage for your first 12 months of registration.
Official sources
Sources checked: 2026-09-26. Check the official guidance for later changes.
Educational information and estimates. These tools do not submit VAT returns or determine the treatment of a specific transaction.