The VAT Flat Rate Scheme: UK Businesses
Updated 30 October 2026
Written for the 2026 VAT codes
This article uses the 2026 VAT codes that new customers are set up on. If your codes look like S1, P1 or TP20, you are on the current codes: see UK VAT Codes (Tax Codes) and Moving to the 2026 VAT Codes.
This article is for UK businesses on the VAT Flat Rate Scheme.
What the scheme is
Under the Flat Rate Scheme, you pay HMRC a fixed percentage of your VAT-inclusive turnover. You charge your customers VAT at the normal rates, but you do not reclaim VAT on your purchases, except on some capital goods.
Who can use it
- You can join if you expect your taxable turnover, excluding VAT, to be £150,000 or less in the next year.
- You must leave if your total income, including VAT, passes £230,000 in a year.
- You cannot use the scheme alongside the Capital Goods Scheme, a VAT group or the margin schemes for second-hand goods.
Your flat rate percentage
- Your percentage depends on your trade sector. HMRC publishes the list of sectors and rates.
- If you are a limited cost business, you use 16.5% whatever your sector. You are a limited cost business if your spend on relevant goods is less than 2% of your turnover, or less than £1,000 a year. For a quarterly return the £1,000 becomes £250.
- In your first year of VAT registration, you take 1% off your percentage.
Aedon checks the limited cost test at each return and applies 16.5% when it is met.
Your codes
| Code | Use it for |
|---|---|
TAX-SAL-20-FRS |
Sales at 20% |
TAX-SAL-05-FRS |
Sales at 5% |
TAX-SAL-00-FRS |
Sales at 0% |
EXE-SAL-EX-FRS |
Exempt sales, such as rent |
TAX-PUR-NA-FRS |
Purchases. You do not reclaim the VAT |
TAX-PUR-20-FRC |
Capital goods bought in a single purchase of £2,000 or more including VAT, such as a van or a computer package |
You also use these everyday codes: EXE-SAL-EX-INT for bank interest, OOS-SAL-NA for income that is not a sale, the adjustment codes, OOS-PUR-NA and OOS-JNL-NA.
What goes into flat rate turnover
| Included | Left out |
|---|---|
| Sales at 20%, 5% and 0%, including the VAT | Bank interest |
| Exempt income, such as rent | Income that is not from your business |
| Sales of capital goods on which you did not reclaim VAT | Income outside the scope of VAT |
Aedon works out Box 1 by applying your flat rate percentage to your flat rate turnover. Box 6 shows the turnover including VAT.
What is accounted for outside the scheme
- VAT on capital goods of £2,000 or more, which you reclaim in Box 4.
- Reverse charge services bought from overseas, which go in Boxes 1 and 4 as normal. See Reverse Charge VAT: UK Businesses.
- Postponed import VAT, which is added to Box 1 after the flat rate calculation. The value of the imported goods is left out of your flat rate turnover, and you can’t reclaim the import VAT in Box 4 unless the goods are a single purchase of capital goods costing £2,000 or more including VAT.
- Construction work under the domestic reverse charge.
These use the normal International and Construction codes.
Useful HMRC links
- Revenue and Customs Brief 3 (2022): postponed VAT accounting and the Flat Rate Scheme
- HMRC VAT Notice 733: Flat Rate Scheme for small businesses
- HMRC guidance: VAT Flat Rate Scheme, flat rates for types of business
- HMRC guidance: Apply to join the VAT Flat Rate Scheme
Need help?
Ask your accountant whether the scheme suits your business. Many businesses pay more VAT on the scheme than under normal accounting.
For help with Aedon.Accounting itself, please raise a case and our support team will help.
Related articles
Apportionment and Recovery Percentages: Irish Businesses
Apportionment and Recovery Percentages: Irish Charities
Choosing the Right VAT Code: Irish Businesses
Choosing the Right VAT Code: UK Businesses
Choosing the Right VAT Code: UK Charities
Creating New Tax Codes
