The Flat Rate Scheme (FRS) is HMRC's simplified VAT system for small businesses. Instead of tracking input and output VAT separately, you pay HMRC a fixed percentage of your gross turnover and keep the difference. For some businesses this saves money. For others, particularly since the 2017 limited cost trader rules, it is now actively worse than standard VAT. This guide explains how the scheme works, the current industry rates, and how to tell which side you fall on.
How the Flat Rate Scheme works
Under standard VAT accounting, you charge customers VAT at the standard rate (20%), reclaim VAT on your business purchases, and pay HMRC the difference each quarter. Under the Flat Rate Scheme, you still charge customers VAT at 20%, but you pay HMRC a fixed lower percentage of your gross (VAT-inclusive) turnover, and you cannot reclaim input VAT on most purchases.
The maths only works in your favour if your input VAT is low. For service businesses with few purchases (consultants, trainers, designers), the scheme historically saved money. For anyone buying goods regularly, it usually costs more.
Worked example: consultant on 14.5% flat rate
- You invoice a customer £5,000 plus 20% VAT, so charge £6,000 gross.
- Under standard VAT, you would pay HMRC the £1,000 you collected (less any input VAT on your business purchases).
- Under FRS at 14.5%, you pay HMRC 14.5% of £6,000 = £870.
- You keep the difference (£130) instead of HMRC.
That looks like free money, but you have given up the right to reclaim input VAT on most expenses. Whether you are better or worse off depends on how much VAT-bearing input you would otherwise have reclaimed.
Eligibility
- Your VAT-exclusive taxable turnover must be £150,000 or less when you join.
- You must leave the scheme once your total VAT-inclusive income exceeds £230,000 in a year.
- You cannot join if you left the scheme in the last 12 months, are (or in the last 24 months were) in a VAT group or eligible to join one, or your business is associated with another business. A VAT offence or dishonesty penalty in the last 12 months also rules you out.
- The scheme has its own cash-based turnover method, so you do not run the separate Cash Accounting Scheme alongside it.
Current flat rate percentages by industry
HMRC publishes a list of percentages by industry sector. These are the rates that apply from your second year onwards. In your first year of VAT registration, you get a 1% discount on whatever rate applies.
| Sector | Flat Rate |
|---|---|
| Accountancy or book-keeping | 14.5% |
| Advertising | 11% |
| Agricultural services | 11% |
| Any other activity not listed elsewhere | 12% |
| Architect, civil and structural engineer or surveyor | 14.5% |
| Boarding or care of animals | 12% |
| Business services not listed elsewhere | 12% |
| Catering services including restaurants and takeaways | 12.5% |
| Computer and IT consultancy or data processing | 14.5% |
| Computer repair services | 10.5% |
| Entertainment or journalism | 12.5% |
| Estate agency or property management services | 12% |
| Farming or agriculture not listed elsewhere | 6.5% |
| Film, radio, television or video production | 13% |
| Financial services | 13.5% |
| Forestry or fishing | 10.5% |
| General building or construction services | 9.5% |
| Hairdressing or other beauty treatment services | 13% |
| Hiring or renting goods | 9.5% |
| Hotel or accommodation | 10.5% |
| Investigation or security | 12% |
| Labour-only building or construction services | 14.5% |
| Laundry or dry-cleaning services | 12% |
| Lawyer or legal services | 14.5% |
| Library, archive, museum or other cultural activity | 9.5% |
| Management consultancy | 14% |
| Manufacturing fabricated metal products | 10.5% |
| Manufacturing food | 9% |
| Manufacturing not listed elsewhere | 9.5% |
| Manufacturing yarn, textiles or clothing | 9% |
| Membership organisation | 8% |
| Mining or quarrying | 10% |
| Packaging | 9% |
| Photography | 11% |
| Post offices | 5% |
| Printing | 8.5% |
| Publishing | 11% |
| Pubs | 6.5% |
| Real estate activity not listed elsewhere | 14% |
| Repairing personal or household goods | 10% |
| Repairing vehicles | 8.5% |
| Retailing food, confectionery, tobacco, newspapers or children's clothing | 4% |
| Retailing pharmaceuticals, medical goods, cosmetics or toiletries | 8% |
| Retailing not listed elsewhere | 7.5% |
| Retailing vehicles or fuel | 6.5% |
| Secretarial services | 13% |
| Social work | 11% |
| Sport or recreation | 8.5% |
| Transport or storage, including couriers, freight, removals and taxis | 10% |
| Travel agency | 10.5% |
| Veterinary medicine | 11% |
| Wholesaling agricultural products | 8% |
| Wholesaling food | 7.5% |
| Wholesaling not listed elsewhere | 8.5% |
| Limited cost business (any sector, see below) | 16.5% |
Source: HMRC, VAT Flat Rate Scheme: flat rates for types of business, which VAT Notice 733 (paragraph 4.3) points to for the sector rates. Checked 1 October 2026. The rates above are the current ones. Catering, hotels and accommodation, and pubs had temporary lower rates between 15 July 2020 and 31 March 2022; the rates shown apply from 1 April 2022. Labour-only building or construction means the materials you supply are worth less than 10% of turnover for those services; otherwise use general building or construction services (9.5%). The same rates are used by the comparison on our VAT threshold calculator.
The limited cost trader trap
Since April 2017, you have to test each VAT period whether you qualify as a "limited cost trader" (LCT). If you do, your flat rate becomes 16.5% regardless of your sector. The test (VAT Notice 733, paragraph 4.4): you are a limited cost business if what you spend on relevant goods, including VAT, is either less than 2% of your VAT-inclusive flat rate turnover, or more than 2% but less than £1,000 a year (£250 for a quarterly return).
Critically, "relevant goods" excludes most things service businesses buy: capital goods, food and drink, vehicles and fuel for vehicles, and any services. So a consultant whose only purchases are software subscriptions and travel is almost always an LCT.
At 16.5% on the gross, the LCT rate effectively reclaims none of your input VAT and gives you no benefit from joining the scheme. If you are an LCT, the standard VAT scheme is almost always cheaper or break-even.
Example: when the LCT rate hurts
- You invoice £10,000 plus VAT (£12,000 gross).
- LCT flat rate at 16.5% = £1,980 owed to HMRC.
- Under standard VAT you would owe £2,000 minus input VAT. If your input VAT was £100, you would owe £1,900, £80 less than the LCT rate.
- The LCT rate is structured to leave most service businesses worse off than standard VAT.
The 1% first-year discount
If you are in your first 12 months of VAT registration, you get a 1% discount on whichever flat rate applies. So an IT consultancy at 14.5% pays 13.5% in year one. The discount runs for exactly one year from the date your VAT registration becomes effective, not from when you joined the scheme.
Should you join?
The scheme tends to favour:
- Service businesses with high turnover and low input VAT
- Consultants and freelancers in their first year (1% discount)
- Businesses that find standard VAT accounting too time-consuming
The scheme tends to hurt:
- Limited cost traders (forced onto 16.5%)
- Anyone who buys goods or stock regularly
- Businesses with significant capital purchases (you can still reclaim VAT on capital assets above £2,000 even on FRS, but smaller items are blocked)
Run the maths both ways before joining. A spreadsheet with one quarter of real invoices and expenses will tell you within ten minutes whether the scheme helps you or not.
How to join and leave
Apply via your VAT online account or by submitting form VAT600 FRS. You can join at any point and the change takes effect from the start of your next VAT period. To leave, write to HMRC at least 30 days before the end of a VAT period. You cannot rejoin within 12 months of leaving.