What is the VAT Flat Rate Scheme?
The HMRC VAT Flat Rate Scheme (FRS) is a simplified way for small UK businesses to calculate and pay VAT. Instead of tracking VAT on every individual sale and purchase, you pay HMRC a fixed percentage of your gross (VAT-inclusive) turnover. This percentage varies by business sector and is set by HMRC.
The scheme is designed to reduce the administrative burden of VAT accounting for small businesses — and can sometimes result in paying less VAT than under the standard method, depending on your sector rate and how much VAT you reclaim on purchases.
How the Flat Rate Scheme Works
When you use the Flat Rate Scheme, you still charge your customers the standard 20% VAT rate as normal. But instead of paying HMRC the difference between VAT collected and VAT paid on purchases, you simply pay a fixed percentage of your gross turnover.
Your VAT Payment to HMRC
VAT due = Gross turnover × FRS %
e.g. £12,000 × 14.5% = £1,740
VAT you collected from client
£12,000 × 20% = £2,000
You keep: £2,000 − £1,740 = £260
📊 Worked Example — IT Consultant on Flat Rate Scheme
HMRC Flat Rate Percentages by Sector (2026)
Your flat rate percentage depends on your business sector as defined by HMRC. Choose the sector that best describes your main business activity.
| Business Sector | Flat Rate % |
|---|---|
| Accountancy or bookkeeping | 14.5% |
| Architect, civil and structural engineer or surveyor | 14.5% |
| Computer and IT consultancy or data processing | 14.5% |
| Consulting or professional advice | 14% |
| Entertainment or journalism | 12.5% |
| Hairdressing or other beauty treatment services | 13% |
| Hotel or accommodation | 10.5% |
| Legal services | 14.5% |
| Management consultancy | 14% |
| Marketing or advertising | 11% |
| Pubs | 6.5% |
| Restaurants and takeaways | 12.5% |
| Retail — general | 7.5% |
| Transport or storage (including courier, freight, removals) | 10% |
Full list: HMRC Flat Rate Scheme percentages (GOV.UK)
Who Can Join the Flat Rate Scheme?
You can join the HMRC Flat Rate Scheme if your expected taxable turnover in the next 12 months is £150,000 or less (excluding VAT). You must also be VAT-registered. You cannot join if you have left the scheme in the past 12 months, or if you are closely associated with another business also on the scheme.
The 1% First Year Discount
HMRC gives new VAT registrants a 1% discount off their flat rate percentage in the first year of VAT registration. So an IT consultant would pay 13.5% instead of 14.5% for their first year. This is automatic — you do not need to apply separately.
Important: The Flat Rate Scheme does not always save money. If your business has significant VAT-reclaimable purchases (materials, equipment), you may be better off on the standard VAT scheme where you can reclaim input VAT. Always run the numbers for your specific situation. Source: HMRC Flat Rate Scheme guidance (GOV.UK)