VAT flat rate scheme 2025/26: rates, limited cost trader rules and examples
Summary
Updated September 2025 — Sources: HMRC VAT Notice 733, GOV.UK.
The VAT flat rate scheme (FRS) simplifies VAT accounting for eligible small businesses. Instead of calculating output VAT minus input VAT each quarter, you apply a fixed percentage to your gross turnover (including VAT) and pay that to HMRC.
1. How the scheme works
You invoice clients at the standard 20% VAT rate as normal. HMRC receives a lower flat percentage of your gross sales. The difference between VAT collected and VAT paid is effectively your compensation for not reclaiming most input VAT.
| Step | Action |
|---|---|
| Invoice | Charge 20% VAT on taxable supplies |
| Calculate | Apply your sector flat rate to gross turnover |
| Pay | Submit the flat rate amount on your VAT return |
2. Sector rates for 2025/26
HMRC publishes sector-specific percentages. Common examples include IT consultants (14.5%), management consultants (14%), and general business services (12%). Always verify your exact sector code on GOV.UK before joining.
3. Limited cost trader rule
Since 2017, businesses spending little on goods face a 16.5% rate regardless of sector. You are a limited cost trader if goods cost less than 2% of turnover or less than £1,000 annually. Labour, services, food, vehicles, and capital equipment do not count as goods.
4. Worked example
A freelance IT consultant with £80,000 gross turnover (including VAT) at the 14.5% flat rate pays HMRC £11,600. Standard VAT accounting on the same turnover might yield a different net position depending on input VAT — model both before electing.
5. When to leave
- Turnover exceeds £230,000 (including VAT)
- You regularly reclaim significant input VAT
- You make substantial zero-rated or exempt supplies
- You join a VAT group
6. Sources
FAQ
Who can join the VAT flat rate scheme?
Generally businesses with VAT taxable turnover up to £150,000 (excluding VAT). You must leave once turnover exceeds £230,000. Confirm current thresholds on GOV.UK.
What is the limited cost trader rate?
If goods cost less than 2% of turnover or £1,000 per year, you pay 16.5% instead of your sector rate. This prevents abuse where labour-heavy businesses paid very low flat rates.
Can I reclaim input VAT on the flat rate scheme?
Usually no. You pay a fixed percentage of gross turnover and keep the difference. Exceptions exist for capital assets over £2,000 — check VAT Notice 733.