Written by the TaxTune Editorial Team · Reviewed by our qualified accountants · Updated for 2026
The quick answer On the Flat Rate Scheme you charge VAT at 20% as normal, but pay HMRC a fixed percentage of your gross turnover instead of tracking VAT on every purchase. The percentage depends on your trade, with a 1% discount in your first year. Businesses with very low costs pay a higher 16.5% limited cost rate.

How it works, step by step

  1. Charge VAT normally. You still add 20% VAT to your sales.
  2. Apply your flat rate. Instead of the usual sums, you pay HMRC a set percentage of your VAT inclusive turnover, based on your trade sector.
  3. Take the first year discount. A 1% reduction applies for your first 12 months on the scheme.
  4. Check the limited cost test. If your spending on goods is very low, you must use the 16.5% limited cost business rate, which usually wipes out any benefit.
  5. Keep it simple. You generally do not reclaim input VAT, except on some capital assets over £2,000.

Who it suits, and who it does not

The scheme can benefit businesses with low costs and simple VAT, by reducing admin and sometimes leaving a small surplus. It rarely suits businesses with significant VAT on purchases, because they lose the ability to reclaim it. The limited cost rate exists precisely to remove the advantage for very low cost service businesses.

Not sure the Flat Rate Scheme adds up?

The maths depends on your exact costs and turnover. TaxTune compares the schemes for your business and puts you on whichever leaves you better off, then handles the returns.

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Frequently asked questions

How does the VAT Flat Rate Scheme work?

You charge 20% VAT as usual but pay HMRC a fixed percentage of your gross turnover instead of tracking input VAT on purchases. The percentage depends on your trade, with a 1% discount in the first year.

What is the limited cost business rate?

If your spending on goods is very low, you must use a 16.5% flat rate. This usually removes any saving, so the scheme rarely benefits low cost service businesses.

Can I reclaim VAT on the Flat Rate Scheme?

Generally no. You do not reclaim input VAT in the normal way, although you can reclaim VAT on some capital assets costing more than £2,000 including VAT.

Who should use the Flat Rate Scheme?

It can suit businesses with low costs and simple VAT who value less admin. Businesses with significant VAT on purchases usually pay more on it than on the standard scheme.

Can I leave the scheme?

Yes. You can leave voluntarily, and you must leave if your circumstances no longer meet the conditions. It is worth reviewing periodically as your business changes.