How does the VAT flat rate scheme work?
Answered 11 March 2026
Here is a comprehensive explanation of how the VAT Flat Rate Scheme (FRS) works.
What the law says
The statutory basis for the FRS is VATA 1994, s.26B, which provides:
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Mechanism: Where a taxable person so elects, their VAT liability in respect of their "relevant supplies" in any prescribed accounting period is calculated as the "appropriate percentage" of their "relevant turnover" for that period.
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Relevant turnover means the total of: (i) the value of taxable relevant supplies plus the VAT chargeable on them, and (ii) the value of exempt relevant supplies — i.e. it is a VAT-inclusive figure.
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Appropriate percentage: This is the percentage specified for the category of business carried on by the person.
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No input tax credit: Subject to limited exceptions, a participant in the FRS is not entitled to credit for input tax — the flat rate percentages have an allowance for input tax built into them.
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Eligibility: Regulations may restrict eligibility to participate to specified cases and conditions.
HMRC guidance / practice
Core concept
The FRS allows an eligible business to pay VAT as a percentage of its VAT-inclusive turnover instead of working out the VAT on all its individual sales and purchases. The flat rate percentages are a shortcut to calculating net tax and are not "rates of VAT" — FRS users still issue invoices at the normal VAT rate for the supply.
Eligibility
- The scheme is available to businesses with a VAT-exclusive annual taxable turnover of up to £150,000.
- Businesses must check their turnover on each anniversary of joining; if it exceeds £230,000 (VAT-inclusive), they must usually leave the scheme.
- The scheme is unsuitable where a business regularly receives VAT repayments from HMRC.
How it works in practice
- Businesses continue to charge customers the normal VAT rate (e.g. 20%) on all taxable supplies — not the flat rate percentage.
- They issue normal VAT invoices to VAT-registered customers (which those customers use for their own input tax reclaim).
- The business then pays HMRC by applying its flat rate percentage (ranging from 4% to 14.5% depending on trade sector) to its VAT-inclusive turnover.
- Flat rate turnover includes VAT-inclusive sales at standard, zero and reduced rates, exempt income, and capital expenditure goods (unless dealt with outside the scheme).
- If a business covers more than one trade sector, it uses the flat rate percentage for the largest part of its business by turnover, reviewed at each anniversary.
Input tax and capital expenditure
- Input tax is generally not separately reclaimable — it is already factored into the flat rate percentages.
- Exception: VAT on a single purchase of capital expenditure goods costing £2,000 or more (including VAT) can be reclaimed outside the scheme in box 4 of the VAT return.
- No VAT is claimable where the purchase is split across more than one invoice, is under £2,000 including VAT, or is a supply of services.
Compatibility with other schemes
- The FRS cannot be used alongside the Cash Accounting Scheme, but it has its own cash-based method.
Policy basis
The FRS operates as a "special scheme for small undertakings" under Article 281 of Council Directive 2006/112/EC. It must be revenue neutral in aggregate, though individual businesses may pay more or less VAT than under standard accounting.
Citation sources
An overview is given in Notice 733 VAT Flat rate scheme for small businesses. You should bear in mind the following policy principles when dealing with queries about the scheme: The scheme calculates net tax by reference to flat rate percentages. Those flat rate percentages are simply a short cut to calculating net tax and are not “rates of VAT.” That is why FRS users issue invoices for the normal VAT rate for the supply. The scheme does not negate a business’ ‘right to deduct’ input tax, as the
Your flat rate turnover is all the supplies your business makes, including VAT. This includes the following: the VAT inclusive sales and takings for standard rate, zero rate and reduced rate supplies the value of exempt income, such as any rent or lottery commission — these examples are not exhaustive and you can find out more about exempt income in VAT guide (VAT Notice 700) supplies of capital expenditure goods, unless they are supplies on which VAT has to be calculated outside the Flat Rate S
The Flat Rate Scheme (FRS) allows an eligible business to pay VAT as a percentage of its VAT-inclusive turnover instead of having to work out the VAT on all its sales and purchases. Guidance on the FRS can be found in VAT Flat Rate Scheme. External users can find the guidance at VAT Flat Rate Scheme - HMRC internal manual - GOV.UK (www.gov.uk). The VAT Registration and Accounting Policy team has policy responsibility for the scheme.
If you’re using the Flat Rate Scheme and your business covers more than one trade sector, you use the flat rate percentage for what you expect to be the largest part of your business by turnover in the coming year. If the balance of your business changes during your flat rate year, then you continue to use the percentage that was appropriate at the beginning of that year. If your business includes activities in more than one flat rate sector, you must review the balance between the sectors at ea
An optional flat rate scheme is available to all small businesses with a VAT exclusive annual taxable turnover of up to £150,000. This requirement applies at the point of entry into the scheme. Businesses check their turnover on each anniversary of joining the scheme and if it is over £230,000 (VAT inclusive) they must usually leave the scheme. A business that joins the scheme avoids having to account internally for VAT on all purchases and supplies, and instead calculates its net liability by a
The scheme is for businesses with a turnover of no more than £150,000 a year, excluding VAT. There are some additional rules to stop abuse of the scheme. Section 3 explains the joining conditions in more detail. The Flat Rate Scheme is a simpler method of working out the VAT you must pay to HMRC and so is unsuitable where you regularly receive repayments from HMRC.
You cannot use the Flat Rate Scheme with the Cash Accounting Scheme, but it does have its own cash based method. Read about how to use the Flat Rate Scheme, who can use it and how to apply in Flat rate scheme for small businesses (VAT Notice 733).
Part I The charge to tax Payment of VAT by taxable persons Flat-rate scheme 26B 1 The Commissioners may by regulations make provision under which, where a taxable person so elects, the amount of his liability to VAT in respect of his relevant supplies in any prescribed accounting period shall be the appropriate percentage of his relevant turnover for that period. A person whose liability to VAT is to any extent determined as mentioned above is referred to in this section as participating in the
If you use the Flat Rate Scheme, you can reclaim the VAT you have been charged on a single purchase of capital expenditure goods where the amount of the purchase, including VAT, is £2,000 or more. You deal with these capital expenditure goods outside the Flat Rate Scheme. This means that you claim the input tax in box 4 of your VAT return. No VAT is claimable, as this input tax is already taken into account in the calculation of your flat rate percentage if the supply is: more than one purchase