The Flat Rate VAT Scheme Explained

Most VAT-registered businesses pay HMRC the difference between the VAT they charge customers and the VAT they pay on their own purchases. The Flat Rate Scheme offers a simpler alternative for smaller businesses: instead of tracking input VAT on every purchase, you pay HMRC a single fixed percentage of your VAT-inclusive turnover.

How it differs from standard VAT accounting

Under standard VAT accounting, you reclaim VAT on stock, supplies and overheads individually. Under the Flat Rate Scheme, you still charge customers VAT normally, but you don't reclaim input VAT on most purchases — that's already factored into the lower flat rate percentage you pay over. The trade-off is less admin in exchange for giving up itemised input VAT recovery, except on certain capital assets costing more than £2,000.

Who can join

A business can join the scheme if its expected VAT-inclusive turnover for the next 12 months is £150,000 or less. Once in the scheme, a business must leave if turnover in the last 12 months exceeded £230,000, or if there are reasonable grounds to expect it will in the next 30 days alone. Full eligibility and joining details are set out in HMRC's own VAT Flat Rate Scheme guidance.

Did the 2026 summer VAT cut affect the Flat Rate Scheme?

From 25 June to 1 September 2026, HMRC ran a temporary UK-wide reduced rate of 5% VAT on qualifying children's meals eaten on the premises and certain child or family admission tickets — theatres, cinemas, zoos, museums, adventure parks and similar attractions — as part of that year's "Great British Summer Savings" measure. For a hospitality or attractions business on the Flat Rate Scheme, HMRC's own guidance was direct: Revenue and Customs Brief 5 (2026) states plainly that "these changes do not affect the Flat Rate Scheme. If you use the scheme, continue to apply your current percentage to calculate your VAT liability."

That's the official position on the mechanics — nothing to change procedurally. Several accountants did flag a practical wrinkle worth checking rather than an HMRC warning as such: a flat rate percentage is calibrated on a normal mix of standard-rated sales, so a business taking a meaningful share of turnover through 5%-rated children's meals or admissions during that window was still paying its full flat rate percentage against that lower VAT-inclusive figure. Worth comparing against standard VAT accounting for that specific quarter if reduced-rate trade was a significant slice of turnover, rather than assuming the usual sums still held.

How the flat rate percentage is set

The flat rate percentage depends on the trade sector a business falls into — HMRC publishes a full list, and rates typically range from around 4% for the lowest to 14.5% for the highest. Businesses in their first year of VAT registration get a 1% discount off their sector rate. There's also a "limited cost business" test: if a business spends very little on goods (as opposed to services), it must use a flat rate of 16.5% regardless of sector, which usually makes the scheme far less attractive for that type of business.

A worked example

Say a consultancy with a 12% sector flat rate invoices £10,000 plus 20% VAT in a quarter, so it collects £12,000 from clients in total. Rather than working out reclaimable input VAT, it simply pays HMRC 12% of that £12,000 VAT-inclusive figure — £1,440. Whatever's left of the £2,000 it originally charged as VAT (£560 in this case) it keeps, in place of reclaiming VAT on its own purchases.

In Sage, that retained difference is usually what lands in code 4099 — Flat Rate Benefit/Cost, which we cover in more detail in our post on management charges and the Flat Rate Scheme adjustment.

Why this matters day to day

The scheme suits businesses with low purchase costs relative to turnover — service businesses in particular — since the simplified bookkeeping can outweigh giving up input VAT recovery. It tends to suit fewer businesses once the limited cost business rate applies, so it's worth recalculating the numbers periodically rather than assuming it's still the better option as a business's spending pattern changes.