Flat Rate Scheme 2025/26: Simple VAT Guide for Small Businesses

A Guide to the flat rate scheme for VAT

The flat rate scheme is a simplified VAT accounting option that many smaller UK businesses can use to reduce admin burdens — and in some cases, save cash — when dealing with VAT.

With turnover and eligibility rules updated for 2025/26, it’s more important than ever to check if the scheme suits your business.

What is the flat rate scheme?

Under the flat rate scheme, instead of working out output VAT (VAT added to your sales) minus input VAT (VAT you’ve paid on purchases), you simply take your VAT-inclusive turnover for the period and apply a flat percentage rate (based on your business sector) to determine what you owe to HM Revenue & Customs.


It’s designed to simplify VAT record-keeping for smaller businesses and may improve cash-flow in the right circumstances.

Who qualifies for the flat rate scheme?

Eligibility criteria for 2025/26

To join the flat rate scheme, your business must meet a number of conditions, including:

  • You must be VAT-registered (or registering) and your estimated VAT-taxable turnover (excluding VAT) in the next 12 months must be £150,000 or less.

  • Once you’ve joined, you can stay in the scheme until your VAT-inclusive turnover is expected to exceed £230,000 in the next 12 months or the next 30 days.

  • You cannot join the scheme if you’ve left it within the last 12 months, or in certain other circumstances (e.g., using the margin scheme, or being part of a VAT group).

Why these rules matter

Businesses approaching the turnover thresholds need to monitor closely: once you’re over the £230,000 threshold or expect to be, you must leave the scheme.

The flat rate scheme is not automatically advantageous for every business.

If you have high input tax (lots of VAT reclaimable) it may be less beneficial.

How the flat rate scheme works in practice

When using the flat rate scheme:

  • You still charge VAT at the usual rate (e.g., 20%) to your customers and issue VAT invoices if required.

  • For your VAT return you instead use the VAT-inclusive turnover amount (i.e., sales including VAT) and apply your applicable flat rate percentage to that amount to calculate the VAT you pay.

Infographic explaining the pros and cons of the VAT flat rate scheme, showing key advantages like simplicity and potential savings, and disadvantages such as higher VAT for limited cost businesses.

  • You generally cannot reclaim input VAT as you would under the standard VAT accounting method, except in specific cases (e.g., capital assets costing £2,000 or more including VAT).

  • The scheme uses a cash-turnover method for many businesses, meaning turnover is based on payments received rather than invoices raised, which can help with cash-flow.

Example scenario:
If your business’s VAT-inclusive turnover is £120,000, and the flat rate percentage for your sector is 10 %, under the scheme you’d pay £12,000 VAT (i.e. 10 % of £120,000) rather than calculating output minus input VAT.
Of course, you need to compare this to what you’d owe under standard VAT accounting to assess whether the flat rate scheme gives benefit.

Sector-rates, “limited cost businesses” and the first-year discount

Flat rate percentages and limited cost business rule

Under the flat rate scheme, your flat rate percentage depends on the sector in which your business operates.

However, some businesses fall under the “limited cost trader” rule.

If your relevant goods spend is below a certain threshold (typically less than 2 % of turnover or £1,000 per year), you may have to apply a higher flat rate (e.g., 16.5 %).

First-year discount

If you are newly VAT-registered, you may benefit from a 1 % reduction on your flat rate percentage for the first year of registration (subject to conditions).

Why you need to check the numbers

For some businesses the flat rate scheme may result in higher VAT liability than standard VAT accounting, especially if you reclaim significant input VAT or make a high proportion of zero-rate/exempt supplies.

Is the flat rate scheme a good idea for your business?

Advantages

  • Simpler record-keeping: you don’t need to track input VAT or make complex calculations.

  • Cash-flow benefit: because you pay a fixed percentage on turnover, you may benefit if input VAT is minimal and you collect payments quickly.

  • First-year discount for new registrants can make it more attractive.

Disadvantages

  • If your business has large VAT-reclaimable purchases, you may be worse off compared to standard VAT accounting.

  • If you carry out a lot of zero-rated or exempt sales (which are still included in turnover for the scheme), you might pay more VAT than you would otherwise.

  • Businesses that are growing fast may quickly exceed the turnover limits and have to leave the scheme (and potentially deal with more VAT admin).

Decision tip:
Run a comparison for your business: calculate VAT liability both under standard VAT accounting and under the flat rate scheme (using your likely flat rate percentage). See which method offers the best outcome for you.

Contact Us

How Trueman Brown can help with the flat rate scheme

If you’re considering the flat rate scheme, our team at Trueman Brown are ready to assist.

We’ll work through your figures, check eligibility, and help you choose the right VAT accounting method for 2025/26 and beyond.

  • Contact Mark at mark@truemanbrown.co.uk

  • Call us on 01708 397262
    Whether you’re joining the scheme, checking whether to stay in it, or leaving it, we can guide you through the process, fill in the form (VAT600FRS) if applicable, and ensure you comply with HM RC rules.

Frequently Asked Questions (FAQ)

Q: What is the turnover threshold for joining the flat rate scheme in 2025/26?
A: You can join if your VAT-taxable turnover (excluding VAT) in the next 12 months is expected to be £150,000 or less.

Q: How long can I stay on the flat rate scheme?
A: Once accepted, you can stay on the scheme until your VAT-inclusive turnover is expected to exceed £230,000 in the next 12 months or you expect in the next 30 days to exceed that amount.

Q: Can I reclaim input VAT if I use the flat rate scheme?
A: Generally no — you cannot reclaim input VAT under the flat rate scheme, except on capital assets costing £2,000 or more including VAT (assuming you meet the normal reclaim rules).

Q: What happens if I become a “limited cost trader”?
A: If your business is classed as a limited cost business (i.e., relevant goods spend is below certain thresholds) you may have to apply a higher flat rate percentage (for example 16.5%) regardless of your sector.

Q: Do I need to do anything if my business changes sector or turnover increases?
A: Yes — you must monitor your business. If your turnover increases such that you expect to exceed thresholds, or the nature of your business changes (so a different flat rate applies), you should check eligibility and may need to notify HMRC.

Q: How do I apply to join the flat rate scheme?
A: You can apply using form VAT600FRS (if you’re already VAT-registered) or when you register for VAT. Always ensure you apply before you start using the scheme.

Q: Is the flat rate scheme still worth it for a small business in 2025/26?
A: It can be — particularly if you have low input tax, limited reclaimable purchases, and your turnover is steady and within threshold. But if you have high input costs, many zero-rated or exempt sales, or fast growth, you may be better off using standard VAT accounting. It’s best to compare the numbers or seek advice.