Should You Opt In or Out of the VAT Flat Rate Scheme in 2025/26?

The VAT Flat Rate Scheme (FRS) is designed to simplify VAT reporting for small businesses — but in 2025/26, many business owners are asking whether it’s still worth using. With VAT thresholds frozen, costs rising, and the limited cost trader rule still in place, the scheme is no longer a guaranteed win.

So, should you join the scheme, stay on it, or switch back to standard VAT accounting?

This post breaks down how the Flat Rate Scheme works in 2025/26, who benefits most, and what you need to watch out for before opting in or out.

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What Is the VAT Flat Rate Scheme?

The Flat Rate Scheme is a simplified VAT scheme available to small businesses with a VAT-taxable turnover of £150,000 or less (excluding VAT).

Instead of reclaiming VAT on purchases and accounting for VAT on each sale, you:

• Charge 20% VAT to your customers as normal
• Pay HMRC a fixed percentage of your gross VAT-inclusive turnover, based on your business type

This fixed percentage varies by industry — for example:

You keep the difference between the VAT you charge customers (20%) and what you pay HMRC under the fixed rate — instead of itemising input VAT on purchases.

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Who Is the Scheme For?

The Flat Rate Scheme is designed for:

• Freelancers and consultants with low overheads
• Service-based businesses with few VATable expenses
• Businesses seeking simplified VAT calculations

Key Benefits:

 Simpler bookkeeping — no need to track VAT on every purchase
 Fewer errors — flat percentage makes returns quicker
 Can be financially beneficial if your costs are low
1% discount in your first year of VAT registration (reducing your flat rate further)

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The Limited Cost Trader Rule

Introduced in 2017, this rule is the main reason why many small businesses no longer benefit from the Flat Rate Scheme.

If you’re classed as a limited cost trader, you must use a higher flat rate of 16.5%, regardless of your industry.

You’re a limited cost trader if:

• Your spend on goods (not services) is less than 2% of VAT-inclusive turnover, or
• You spend less than £1,000 per year on goods (if 2% is less than £1,000)

Goods must be used exclusively for business purposes and exclude:

• Capital items
• Food and drink
• Vehicles, fuel, and related parts
• Services (e.g. accounting, software, marketing)

Result:

If you fall under the limited cost rule, you must apply a 16.5% flat rate — which often eliminates any savings, and can even cost you more than standard VAT.

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Example: IT Consultant on Flat Rate vs Standard VAT

Let’s compare:

Consultant on Standard VAT:

• Charges £30,000 + VAT = £36,000 total
• Input VAT on expenses = £2,000
• VAT payable to HMRC = £6,000 – £2,000 = £4,000

Consultant on Flat Rate Scheme (14.5%):

• VAT-inclusive turnover = £36,000
• Flat rate VAT = 14.5% of £36,000 = £5,220
• No VAT reclaimed on expenses

Outcome: Consultant pays £1,220 more under FRS — unless they have very few VATable costs

If the same consultant is classed as a limited cost trader and must use 16.5%:

• 16.5% of £36,000 = £5,940
• Now the consultant is paying almost all the VAT collected — leaving little or no benefit.

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When Is the Flat Rate Scheme Still Worth It?

The scheme may still be worthwhile if:

• You have low VATable costs (e.g. service-based work, little travel or materials)
• You don’t fall under the limited cost trader rule
• You want a simpler way to manage VAT
• You’re in your first year of VAT registration (with a 1% rate reduction)

It can also help with:

• Reducing the chance of errors during quarterly returns
• Saving time and bookkeeping costs

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When You Should Leave or Avoid the Scheme

It may be better to use standard VAT accounting if:

• You regularly incur VAT on goods or equipment
• You are classed as a limited cost trader
• Your VATable purchases exceed the value reclaimed through FRS
• You work in a sector with high input VAT (e.g. trades, retail)

Also consider opting out if:

• You’ve grown and now need to account for VAT more accurately
• You’re investing in large capital items or stock
• You’re planning to sell zero-rated goods (since FRS is based on gross turnover, not VAT rates)

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Joining or Leaving the Scheme: How to Do It

To join the scheme:

• You must be VAT registered
• Your VAT-taxable turnover must be £150,000 or less (excluding VAT)
• You apply to HMRC online or via your accountant

Once accepted, you use the scheme until you leave voluntarily or exceed the £230,000 turnover exit threshold

To leave the scheme:

• You can opt out at any time by informing HMRC
• You must leave if your VAT-inclusive turnover exceeds £230,000 in a 12-month period
• Once you leave, you revert to standard VAT accounting

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Strategic Tip: Use Flat Rate in Year One Only

The scheme still offers a 1% discount in your first 12 months of VAT registration. So, if you’re registering for VAT for the first time, you could:

1. Use the Flat Rate Scheme for 12 months

2. Take advantage of the lower rate

3. Switch to standard VAT after one year if your costs increase

This can provide a short-term cash flow benefit during a crucial startup phase.

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Summary: Should You Use the Flat Rate Scheme?

There’s no one-size-fits-all answer — but you can weigh up the pros and cons based on your business’s size, sector, and cost profile.

Flat Rate Scheme is likely a good fit if:

 You sell B2B services with minimal goods purchases
 You want simplified VAT returns
 You’re newly VAT registered and want to benefit from the 1% discount
 You can avoid the limited cost trader rules

Flat Rate Scheme is not ideal if:

 You’re a limited cost trader (16.5% rate)
 You reclaim significant VAT on expenses
 You deal with zero-rated or exempt goods
 You’re growing and expect to exceed the turnover limit soon

VAT can be complex, but the right scheme can make a noticeable difference to your time and your tax bill. Review your costs, do the numbers — and speak to your accountant if you’re unsure.