by Asim Abbas
11 November 2026 
VAT Flat Rate Scheme: is it still worth it?
VAT Flat Rate Scheme: is it still worth it?
The VAT Flat Rate Scheme was designed to make VAT simpler for small businesses. Instead of tracking VAT on every purchase, you pay a fixed percentage of your turnover.
- You pay a fixed percentage of gross turnover to HMRC
- Join if turnover is under £150,000 (excluding VAT)
- Limited cost traders pay 16.5%
- You can’t usually reclaim VAT on purchases
For some businesses it still saves money and admin. For many service businesses with low costs, the limited cost trader rule means it now costs more.
This guide explains how the scheme works, who can join and how to tell whether it’s right for you.
How the Flat Rate Scheme works
You still charge your customers 20% VAT. But instead of paying the difference between VAT charged and VAT on costs, you pay HMRC a flat percentage of your VAT-inclusive turnover. The rate depends on your business sector, and there’s a 1% discount in your first year of VAT registration.
Who can join?
- Your expected taxable turnover for the next 12 months is £150,000 or less, excluding VAT
- You must leave if your total income passes £230,000
- You haven’t left the scheme in the last 12 months
The limited cost trader rule
You’re a limited cost trader if you spend less than 2% of your turnover, or less than £1,000 a year, on goods. If so, you must use a rate of 16.5%, whatever your sector. Services, rent, fuel, food for staff and capital items don’t count as goods.
A consultant charges £60,000 plus £12,000 VAT. Under standard VAT, with £1,200 of VAT on costs, they’d pay £10,800. On the Flat Rate Scheme as a limited cost trader, they’d pay 16.5% × £72,000 = £11,880, so it costs £1,080 more. With a lower sector rate, say 12.5%, they’d pay £9,000 and save £1,800.
Income tax calculator
See how VAT costs affect your take-home.
Who it usually suits
- Businesses that buy enough goods to avoid limited cost trader status
- Sectors with a low flat rate and few VAT-able costs
- Businesses that value simpler records
Who it usually doesn’t suit
- Consultants, IT contractors and other service businesses with few goods
- Businesses with high VAT-able costs
- Businesses that make lots of zero-rated or exempt sales
Fixed-fee accountancy support
Transparent monthly packages for sole traders, landlords and limited companies. Fixed fees agreed upfront, VAT included.
Get a fixed-fee quoteCall 0161 531 4179Capital purchases
You can reclaim VAT on single capital purchases of goods costing £2,000 or more including VAT, such as equipment or machinery.
Leaving the scheme
You can leave at any time by telling HMRC, and you must leave if your income passes £230,000. HMRC lists sector percentages on GOV.UK. Our VAT services compare both methods for you each year.
What should I do next?
On GOV.UK.
Under 2% means 16.5%.
Using last year’s figures.
Our VAT team can check it.
Frequently Asked Questions
What is the Flat Rate Scheme turnover limit?
You can join if you expect taxable turnover of £150,000 or less, excluding VAT, and must leave if total income passes £230,000.
What is a limited cost trader?
A business spending less than 2% of turnover, or under £1,000 a year, on goods. It must use a 16.5% flat rate.
Do I still charge 20% VAT on the Flat Rate Scheme?
Yes. Customers see normal VAT. Only the amount you pay HMRC is worked out differently.
Can I reclaim VAT on a laptop?
Only if it’s a single capital purchase of £2,000 or more including VAT.
Is there a first-year discount?
Yes. You get 1% off your flat rate for the first year after VAT registration.
Need help with this? Wingate Accountants offers fixed-fee online accountancy support across the UK. Call 0161 531 4179 or request a quote at wingateaccountants.co.uk.
About the Author
Ali Imran
I’m Ali Imran, an accountant at Wingate Accountants. I help sole traders, landlords and directors get their returns filed early and accurately, without the last-minute panic.
