The VAT Flat Rate Scheme simplifies VAT administration and, for some businesses, offers a financial benefit. But since the introduction of the limited cost trader rules in 2017, many freelancers and service businesses no longer benefit. Here’s how to work out whether FRS is right for you.
How the Flat Rate Scheme Works
Under standard VAT:
- You charge 20% VAT to customers
- You reclaim VAT on your purchases (input VAT)
- You pay HMRC the difference
Under the Flat Rate Scheme:
- You charge 20% VAT to customers (same as normal)
- You pay HMRC a fixed percentage of your VAT-inclusive turnover — whatever your sector rate is
- You do not reclaim VAT on purchases (with one exception below)
Example — a business with a 14% flat rate:
| Standard VAT | Flat Rate Scheme | |
|---|---|---|
| Sales (ex-VAT) | £10,000 | £10,000 |
| VAT charged to customers | £2,000 | £2,000 |
| Purchases (ex-VAT) | £1,000 | £1,000 |
| Input VAT reclaimed | £200 | £0 |
| VAT paid to HMRC | £1,800 | £1,680 (14% × £12,000) |
| Net VAT saved vs standard | — | £120 |
Flat Rate Percentages by Sector (2026/27)
HMRC assigns a flat rate based on your principal business activity. A sample of common rates:
| Business type | Flat rate % |
|---|---|
| Accountancy or bookkeeping | 14.5% |
| Architecture | 14.5% |
| Business services (not elsewhere classified) | 12% |
| Catering services including restaurants | 12.5% |
| Computer repair services | 10.5% |
| Consulting or professional services | 14% |
| Hairdressing or beauty treatment | 13% |
| IT services | 14.5% |
| Labour-only construction | 14.5% |
| Law firm (other than barrister) | 14.5% |
| Printing | 8.5% |
| Retailer (food, confectionery, tobacco etc.) | 4% |
| Retailer (other) | 7.5% |
| Travel agent | 10.5% |
| Veterinary medicine | 11% |
| Limited cost trader | 16.5% |
For a full list, see HMRC Notice 733.
The Limited Cost Trader Test
Since April 2017, businesses that spend little on goods may be forced to use the 16.5% rate, regardless of their sector.
You are a limited cost trader if your spend on relevant goods is:
- Less than 2% of your VAT-inclusive turnover in the accounting period, OR
- Less than £1,000 per year (even if above 2%)
What counts as relevant goods:
- Physical goods you buy to use in your business
- Stock you sell to customers
What does NOT count:
- Services (including software, telecoms, accountancy, rent)
- Food and drink for staff
- Capital expenditure items
- Fuel
Typical businesses classed as limited cost traders:
- IT contractors and consultants
- Freelancers and copywriters
- Marketing and PR agencies
- Life coaches, therapists
- Most service-based businesses
For a limited cost trader at 16.5%:
| Sales (ex-VAT) | VAT collected | FRS payment (16.5% × VAT-inc.) | Net to HMRC | Benefit vs standard VAT |
|---|---|---|---|---|
| £50,000 | £10,000 | £9,900 | £9,900 | £100 (minimal) |
Once you factor in the bookkeeping simplicity, there’s usually no cash benefit — and standard VAT is often better if you have any recoverable input VAT.
The 1% Discount for New VAT Registrations
In your first year of VAT registration, you receive a 1% reduction on your flat rate percentage. This applies for the first 12 months from your VAT registration date only.
Example: If your sector rate is 14.5%, you pay 13.5% in your first year.
Capital Assets — The One Input VAT Exception
Under FRS, you cannot reclaim VAT on ordinary purchases. The exception:
If you buy a capital asset with a cost (including VAT) of £2,000 or more on a single invoice, you can reclaim the input VAT on that specific purchase.
Examples: a new computer for £2,400, professional equipment for £5,000.
You must account for this claim separately on your VAT return.
Is the Flat Rate Scheme Worth It?
When FRS is Usually Beneficial
- Product retailers and manufacturers with sector rates below ~12%
- Businesses with very low purchase costs and a sector rate below 16.5%
- Businesses in the first year of VAT registration (1% discount adds value)
- Businesses where simplified administration is worth more than marginal VAT savings
When FRS is Usually NOT Beneficial
- Service businesses or contractors who are limited cost traders (16.5% rate)
- Businesses with high VAT-able purchases (you lose input VAT reclaim)
- Businesses close to the £150,000 turnover threshold
- Anyone spending significantly on equipment (better to standard rate and reclaim VAT)
Quick Check Calculation
- Work out your expected annual VAT-inclusive turnover
- Multiply by your flat rate % to get FRS payment
- Work out your actual VAT liability under standard VAT (output VAT minus input VAT)
- If FRS payment is lower → FRS may be beneficial
Joining and Leaving the Flat Rate Scheme
Joining
- Apply online via your HMRC VAT online account
- Or use form VAT600FRS
- You can join from your VAT registration date
Eligibility: VAT-taxable turnover must be £150,000 or less (excluding VAT) in the next 12 months.
Leaving
You must leave FRS if:
- VAT-inclusive turnover exceeded £230,000 in the past 12 months
- You expect total turnover to exceed £230,000 in the next 30 days
You can leave voluntarily at any time by notifying HMRC.
Re-Joining
After leaving FRS, you must wait 12 months before rejoining.
Flat Rate Scheme and Making Tax Digital
Under Making Tax Digital for VAT (now mandatory for all VAT-registered businesses), you must:
- Keep digital VAT records
- Submit VAT returns through MTD-compatible software
The FRS calculation is straightforward to automate — most MTD-compatible software (Xero, QuickBooks, FreeAgent) supports FRS automatically.