---
title: What are the different VAT schemes in 2026/27?
description: For businesses and practitioners navigating the 2026/27 tax year, selecting the optimal Value Added Tax (VAT) accounting method is essential for managing cash flow and reducing administrative burdens. While the standard VAT accounting method requires you to record VAT on…
url: "https://www.accountingfirms.co.uk/knowledge-bank/what-are-the-different-vat-schemes/"
updated: "2026-08-11"
category: Limited Company
---

# What are the different VAT schemes in 2026/27?

For businesses and practitioners navigating the 2026/27 tax year, selecting the optimal Value Added Tax (VAT) accounting method is essential for managing cash flow and reducing administrative burdens. While the standard VAT accounting method requires you to record VAT on every individual invoice issued and received, HMRC provides several simplified schemes.

This guide answers exactly **what are the different VAT schemes**, detailing their entry requirements, operational mechanics, and exit thresholds for 2026/27.

## VAT Registration for 2026/27

Before choosing a scheme, you must determine if the business requires VAT registration. For the 2026/27 tax year, a business must register for VAT if its total taxable turnover over the previous 12 months exceeds the £90,000 registration threshold, or if it expects to exceed that amount in the next 30 days.  Conversely, if your taxable turnover falls below the £88,000 deregistration threshold, you can opt to cancel your VAT registration.

Once registered, you can evaluate which of the following VAT schemes best suits the company's operational profile.

## The Flat Rate Scheme (FRS)

The Flat Rate Scheme simplifies record-keeping by allowing you to [calculate your VAT](https://www.accountingfirms.co.uk/blog/time-to-pay-arrangements-practicalities/) liability as a fixed percentage of your VAT-inclusive turnover.  Instead of calculating the VAT on every purchase and sale, you simply apply your sector-specific flat rate to your gross income and pay that amount to HMRC.

- **Entry Threshold:** To join the Flat Rate Scheme, you must expect your VAT-exclusive taxable supplies in the next 12 months to be no more than £150,000.
- **Exit Threshold:** You must leave the scheme if, on the anniversary of your start date, your total income (including VAT) in the previous year exceeded £230,000, or if you expect your income in the next 30 days to exceed £230,000.
- **Rates:** HMRC assigns different percentages to different business sectors. For example, accountants apply a 14.5% rate, advertising services use 11%, and general building or construction services apply 9.5%.  Additionally, businesses receive a 1% reduction in their flat rate percentage during their first year of VAT registration.

Under the FRS, you still issue standard VAT invoices to your customers charging the normal 20% standard rate, but you cannot reclaim input tax on your general purchases.  An exception applies for capital assets costing £2,000 or more (including VAT), where you can still reclaim the input tax.

## The Cash Accounting Scheme

Under standard accounting, you pay HMRC the VAT you charge on your sales based on the date of the invoice, regardless of whether the customer has paid you. The Cash Accounting Scheme alters this.

Under section 57 of the Value Added Tax Act 1994 (VATA 1994), this scheme allows you to account for output tax on the date you receive payment, and you claim input tax on the date you pay your suppliers.  This scheme heavily benefits businesses that offer extended credit terms to their customers or experience high levels of bad debt.

- **Entry Threshold:** You can join the Cash Accounting Scheme if the annual value of your taxable supplies does not exceed £1,350,000.

## The Annual Accounting Scheme

Typically, businesses submit a [VAT return](https://www.accountingfirms.co.uk/blog/how-to-manage-stress-during-tax-season/) to HMRC every quarter. The Annual Accounting Scheme reduces this administrative frequency.

Section 50 of VATA 1994 allows an authorised taxable person to submit a single VAT return per year.

> "It allows you to submit one VAT Return a year instead of the usual 4. You’ll need to make interim payments by electronic means based on your actual or estimated annual VAT liability."

You typically make nine equal monthly interim payments, submitting your final annual return and balancing payment within two months of the end of the accounting year.

- **Entry Threshold:** Businesses with an expected taxable turnover of up to £1,350,000 can apply to use the scheme.

## Margin Schemes (Second-Hand Goods)

Margin schemes represent a derogation from standard VAT principles, designed specifically for businesses trading in second-hand goods, works of art, antiques, and collectors' items.

The objective of a margin scheme is to prevent double taxation on goods that have already entered circulation.  Instead of charging VAT on the full selling price, you only calculate VAT on the profit margin—the difference between your purchase price and your selling price.

> "The margin is the difference between the total consideration received on the sale of the goods and everything paid for the vehicle there is no provision for a negative margin."

For high-volume, low-value items, [businesses can use the Global Accounting](https://www.accountingfirms.co.uk/blog/vat-calculating-the-profit-margin-when-selling-second-hand-goods/) Scheme, calculating VAT on the total profit margin across all eligible goods during a prescribed accounting period, rather than item-by-item.

## The Agricultural Flat Rate Scheme

Farmers and horticulturists have access to a highly specialised scheme. The Agricultural Flat Rate Scheme allows qualifying farmers to remain entirely unregistered for VAT.

Consequently, they cannot reclaim any input tax on their farming purchases.  To compensate for this loss, the scheme allows them to charge and keep a "flat rate addition" of 4% when they sell qualifying agricultural goods or services to VAT-registered customers.  This 4% addition is not a VAT rate; it acts strictly as compensation, and the farmer treats it as standard business takings.  You must not charge this 4% to [customers who are not registered for VAT](https://www.accountingfirms.co.uk/blog/not-registering-for-vat/).

## Retail Schemes

Retailers often sell high volumes of low-value goods directly to the public without issuing formal tax invoices, making standard VAT accounting nearly impossible. HMRC provides standard retail schemes—such as the point of sale scheme, apportionment schemes, and direct calculation schemes—to calculate the output tax due on retail sales only.

If a retailer's annual turnover of taxable retail sales exceeds £130 million, they cannot use the standard published retail schemes and must agree a bespoke scheme directly with HMRC.

## Summary Table: 2026/27 VAT Schemes

| Scheme | Target Business / Element | Entry Threshold | Key Outcome / Rate |
| --- | --- | --- | --- |
| **Standard VAT Registration** | All applicable businesses | **£90,000** | Must charge and recover VAT on standard terms. |
| **Flat Rate Scheme** | Small businesses wanting simplicity | **£150,000** (Exit £230k) | Apply a fixed sector % to gross turnover; forego input [tax claims](https://www.accountingfirms.co.uk/blog/vat-entertaining-overseas-customers/). |
| **Cash Accounting** | Businesses managing poor [cash flow](https://www.accountingfirms.co.uk/blog/what-is-an-overhead/) | **£1,350,000** | Account for VAT only when payments are received and made. |
| **Annual Accounting** | Businesses seeking reduced admin | **£1,350,000** | Submit one return per year with interim payments. |
| **Margin Schemes** | Second-hand dealers | N/A (Item specific) | Pay VAT only on the profit margin, avoiding double taxation. |
| **Agricultural Scheme** | Unregistered farmers | N/A (Requires approval) | Keep a **4%** flat rate addition on sales to VAT-registered buyers. |
| **Retail Schemes** | High-volume public retailers | Turnover < **£130m** | Calculate output tax using apportionment or point-of-sale data. |

*For completeness, advisors should regularly test clients operating near the £230,000 Flat Rate Scheme exit threshold, as failing to notify HMRC and transition back to standard accounting triggers substantial penalties and retrospective output tax assessments.*