UK VAT Flat Rate Scheme

How the FRS actually works

Standard VAT accounting:

• Charge customers 20% VAT on sales.
• Pay HMRC: (Output VAT on sales) − (Input VAT reclaimed on expenses).
• Quarterly return + lots of bookkeeping.

Flat Rate Scheme:

• Charge customers 20% VAT on sales (as normal).
• Pay HMRC: Gross turnover × Sector FRS percentage.
• You don't reclaim input VAT (except on capital purchases over £2,000).
• Simpler quarterly return.

The difference between the 20% you charged and the FRS percentage you pay is yours to keep (or covers your input VAT).

The sector percentages (2026/27)

Plus first-year users get a 1% discount on their sector rate (e.g. 14.5% becomes 13.5% in year 1).

The "limited cost trader" rule — the 2017 reform

From April 2017, HMRC introduced the "Limited Cost Trader" (LCT) definition. If you meet the LCT criteria, you must pay 16.5% regardless of your business sector.

You are a "limited cost trader" if your VAT-bearing goods are:

• Less than 2% of your gross turnover, OR
• More than 2% of gross turnover but less than £1,000 per year.

This effectively forces most service-based freelancers (consultants, designers, copywriters, etc.) onto the 16.5% rate — close to or above the standard VAT rate they'd pay anyway.

Worked example — Service consultancy

The capital purchase exception

Under FRS, you generally can't reclaim input VAT. But capital purchases over £2,000 (single invoice) are reclaimable. Examples:

• A £3,500 laptop for the business: reclaim 20% × £3,500 = £700.
• £12,000 of office equipment in one purchase: reclaim £2,400.
• £1,800 office desk + £1,800 chair: NOT reclaimable (each below £2,000).

This is the FRS user's only reclaim opportunity. Plan large capital purchases through one invoice to capture the threshold.

Joining and leaving FRS

• To join: turnover below £150,000 (ex-VAT). Apply via HMRC online or by paper VAT600FRS form.
• To leave: can leave any time. Compulsory exit if turnover exceeds £230,000.
• Restrictions: can't rejoin within 12 months of leaving.

When FRS makes sense in 2026/27

FRS saves money in these patterns:

• Catering / pubs / hotels: low FRS rates + significant VAT inputs.
• Retail (food, books, papers): very low FRS rates.
• Service businesses NOT in LCT: those with meaningful taxable inputs (e.g. an architecture firm buying lots of supplies).
• First-year users in any sector: 1% discount makes FRS attractive for year 1 even if you'll switch off later.

FRS rarely makes sense for:

• Limited cost traders (most freelance services).
• Businesses with substantial international (zero-rated outside-scope) sales.
• High-input businesses where reclaiming exceeds the FRS surplus.

Sources and methodology

FRS rates and rules from HMRC published in VAT Flat Rate Scheme guidance. LCT rules from VAT Notice 733. Threshold updates from HMRC Budget announcements. For complex business VAT positions, see the tax adviser editorial recommendation. The methodology page documents sources.

Related guides

• UK VAT registration + MTD
• VAT for digital services
• UK VAT schemes explained
• VAT calculator
• Sole trader calculator

FRS sits on top of being VAT-registered

The Flat Rate Scheme is not an alternative to VAT registration — it is a way of accounting for VAT once you are already registered. So the £90,000 registration threshold still governs whether you are in the VAT system at all. You must register once VAT-taxable turnover exceeds £90,000 on a rolling 12-month basis (the 2026/27 figure); the FRS join and leave limits then sit inside that world:

• £90,000 — compulsory VAT registration threshold (rolling 12 months).
• £150,000 — the most you can have in expected VAT-exclusive turnover when you join the FRS.
• £230,000 — the gross (VAT-inclusive) turnover at which you must leave the FRS.

A business below £90,000 can register voluntarily and still use the FRS — sometimes worthwhile if customers are VAT-registered and the flat-rate surplus is positive. But the scheme only ever applies to a registered business, and you still issue normal 20% VAT invoices to your customers throughout.

FRS vs standard VAT — a clean comparison

Strip the scheme back to its mechanic. On standard VAT you hand HMRC the VAT you charged minus the VAT you were charged. On the FRS you hand over a fixed percentage of your gross (VAT-inclusive) takings and keep the rest — but you give up the right to reclaim input VAT (other than the capital-goods exception above £2,000). Whether FRS wins comes down to one question: is the flat-rate surplus bigger than the input VAT you are giving up the right to reclaim?

For this low-cost consultant — the textbook limited cost trader — the FRS is actually £760 a year worse than standard accounting, because the 16.5% rate leaves almost no surplus and the small input-VAT reclaim is lost. The 1% first-year discount (15.5%) would flip year one into a modest gain, but the structural answer for most low-cost service firms is that FRS no longer pays. Where a business has a lower sector rate and real taxable inputs (the catering example earlier), the comparison swings the other way.

What counts as FRS turnover (and a cash-based option)

The flat-rate percentage is applied to your VAT-inclusive flat-rate turnover, which is broader than many expect:

• All standard-rated, reduced-rated and zero-rated sales (the value still counts even though no VAT is added).
• The value of any exempt supplies and, in some cases, sales outside the scope of UK VAT.

That breadth is exactly why the scheme rarely suits businesses with large zero-rated or international sales: you pay the flat percentage on income that carried little or no output VAT in the first place. By default you calculate on an invoice basis, but HMRC also allows a cash-based turnover method, where you apply the flat rate to payments actually received — helpful for cash flow if customers pay slowly, and broadly similar in effect to the standalone Cash Accounting Scheme (which cannot itself be combined with the FRS).

Who it suits, who it doesn't, and the lighter record-keeping

Pulling the threads together for 2026/27:

• Worth a serious look: catering, pubs, hotels and food/book retail — low sector rates combined with meaningful VAT-bearing costs; and any new registration in its first year, where the 1% discount can tip an otherwise marginal case into a saving.
• Usually not worth it: consultants, designers, copywriters and other low-cost service traders caught by the 16.5% limited-cost-trader rate; businesses with substantial zero-rated or overseas sales; and anyone with large or lumpy input VAT (heavy stock, subcontractors, equipment) that standard accounting lets them reclaim in full.

The genuine upside that survives the 2017 reform is simplicity. Under the FRS you do not have to record and evidence the input VAT on every purchase, so the quarterly return and the underlying bookkeeping are lighter — you still keep your sales records and a VAT account, but the day-to-day burden falls. For a tiny business the time saved can matter as much as the cash. Even so, the rule of thumb stands: run the numbers both ways at least once a year, because a change in your cost base, your sector or your turnover can quietly turn a saving into a loss. The VAT calculator and the broader VAT schemes guide help you check.