Quick answer, reviewed 11 October 2026
The VAT Flat Rate Scheme can simplify calculations, but it does not guarantee a saving. Eligible applicants generally need VAT-taxable turnover expected to be £150,000 or less excluding VAT. The flat rate applies to VAT-inclusive scheme turnover. A limited-cost business generally uses 16.5%; compare that bill with normal VAT accounting after eligible input VAT recovery.
How the scheme works
On normal VAT accounting, you calculate output VAT on taxable sales and deduct eligible input VAT on purchases. Under the Flat Rate Scheme, you still charge customers the appropriate VAT, but generally pay HMRC a percentage of your VAT-inclusive flat-rate turnover. The scheme calculation and the customer invoice are different steps.
The scheme's turnover definition can include more than standard-rated sales, so do not build a comparison from those sales alone without checking your income types. The applicable percentage depends on your business sector and whether the limited-cost rules apply. See GOV.UK's scheme overview and VAT Notice 733.
Joining is different from VAT registration
You must be VAT registered to join, and expected VAT-taxable turnover must generally be no more than £150,000 excluding VAT in the next twelve months. Additional exclusions concern matters such as associated businesses, other schemes and past participation. A forecast should have reasonable grounds and supporting records.
The £150,000 joining limit is not the VAT registration threshold. The general compulsory registration threshold is £90,000, assessed using its own rolling-turnover and forward-look tests. It is possible to be required to register but still qualify to apply for FRS; it is also possible to register voluntarily. See HMRC's registration guidance.
The limited-cost business test has two parts
For each relevant VAT period, assess spending on qualifying relevant goods, including VAT. A business is limited cost where spending is less than 2% of flat-rate turnover, or is more than 2% but below £1,000 a year, apportioned for the period. For an ordinary quarterly period, the annual figure becomes £250.
Services do not count as relevant goods. Capital assets and other specified purchases are excluded; buying unnecessary goods solely to pass the test may also fail the conditions. A software subscription, accountant's bill or rent can carry input VAT yet still not count towards the goods test.
For example, £325 of relevant goods on £20,000 of quarterly flat-rate turnover is above £250 but below 2% (£400). The business therefore uses the 16.5% limited-cost percentage for that period. £260 of relevant goods on £10,000 turnover is above both 2% (£200) and £250, so the limited-cost test does not apply on those assumptions. Source: HMRC's relevant-goods test.
Compare the cash bill correctly
Suppose a limited-cost business invoices £10,000 plus £2,000 standard-rate VAT. Flat-rate turnover is £12,000 and the 16.5% payment is £1,980. The difference from the £2,000 output VAT is only £20 before considering purchase VAT. It is not a £350 or 3.5% saving on the £10,000 net sales.
If normal accounting would permit £200 of input VAT recovery on the same period's purchases, its net bill would be £1,800. FRS at £1,980 is £180 higher in this simplified comparison. That example excludes the first-year discount, capital goods exceptions, other income types and adjustments; include those where they actually apply.
For a sector percentage of 14%, £12,000 gives an FRS payment of £1,680, provided the sector classification is correct and the business is not limited cost. The comparison with normal accounting still depends on the input VAT it would recover. A lower percentage is not sufficient evidence of an overall saving.
Sector rates and the first-year discount
HMRC lists sector percentages, including 14.5% for accountancy or bookkeeping, 14.5% for computer and IT consultancy or data processing, and 14% for management consultancy. Hairdressing is 13%, catering including restaurants and takeaways is 12.5%, and pubs are 6.5%. The limited-cost rate takes priority where its test is met. Check the full current sector table rather than picking the closest sounding description.
A one percentage point reduction generally applies during the first year of VAT registration. The clock runs from registration, not from joining FRS. A business joining the scheme after that first year does not receive a fresh twelve-month discount. Keep the registration date and effective scheme date in the file.
Capital purchases can be an exception
Normally input VAT is not reclaimed under FRS. There is an exception for a single purchase of eligible capital expenditure goods costing £2,000 or more including VAT, subject to the normal VAT recovery rules and the scheme's exclusions. A collection of separate purchases cannot automatically be combined to reach the threshold.
The exception does not cover services or every item described as capital in the accounts. Goods bought for resale, hiring and certain other purposes are excluded. Review the later sale as well because special output VAT treatment can apply. Section 15 of VAT Notice 733 gives the detailed rules.
Leaving: use the right test and date
At the anniversary review, VAT-inclusive total income above £230,000 generally requires departure, with the prescribed timing. HMRC can permit continuation in limited circumstances where next year's turnover is expected not to exceed £191,500. A separate forward-look test applies if income in the next thirty days alone is expected to exceed £230,000.
Other changes can also make the business ineligible. You can leave voluntarily, but notify HMRC and confirm the effective date; rejoining normally has a twelve-month restriction. The annual review is not simply the same rolling twelve-month test used for VAT registration. See HMRC's leaving guidance.
Review the scheme with your real records
Compare a representative year of sales, eligible purchase VAT, relevant goods and planned asset purchases under both methods. Account for exempt or zero-rated transactions and one-off changes. Keep the workings and repeat the review when the business mix changes.
MTD for VAT requirements still apply where you are within scope, whichever calculation method you use. Agree who checks the goods test and turnover limits before each return is submitted. A simple scheme still needs accurate classifications and records.
Frequently asked questions
Is the £150,000 FRS limit the VAT registration threshold?
No. The FRS joining limit is generally expected VAT-taxable turnover of £150,000 or less excluding VAT. The general VAT registration threshold is £90,000 and uses separate tests.
What does the 16.5% flat rate apply to?
It applies to VAT-inclusive flat-rate turnover. On £10,000 plus £2,000 standard-rate VAT, the payment is £1,980 before any applicable discount or special adjustments.
Can an FRS business reclaim VAT on a computer?
A single eligible purchase of capital expenditure goods costing £2,000 or more including VAT may qualify, subject to the normal recovery conditions and scheme exclusions. Separate purchases and services do not automatically qualify.
Reviewed against the linked primary sources on 11 October 2026. This guide gives general information; the tax treatment depends on your circumstances and the relevant tax or accounting period.
For support with your records and calculations, see our vat service or contact Angel Accountancy to discuss your requirements.