Who Can Join the VAT Flat Rate Scheme? UK 2026

A VAT-registered business can normally join the Flat Rate Scheme if expected VAT-taxable turnover excluding VAT is £150,000 or less in the next 12 months. It must not be excluded by recent scheme use, VAT-group or associated-business rules, insolvency or relevant VAT offence history.

The £150,000 entry test

Estimate taxable turnover for the next 12 months. Include standard-, reduced- and zero-rated supplies. Exclude VAT itself and generally exempt or outside-the-scope income for the entry calculation, following HMRC’s definition.

The forecast must reflect confirmed contracts and realistic growth. A historic turnover below £150,000 is not enough if the next year will be higher.

Who cannot normally join?

• a business not registered for VAT;
• a business that used the scheme in the previous 12 months;
• a business in a VAT group or eligible for division registration;
• a business closely associated with another business under the scheme rules;
• an insolvent business;
• a business convicted of a VAT offence or penalised for VAT evasion in the previous year;
• a business using certain second-hand-goods or capital-goods treatments that conflict with Flat Rate.

Associated businesses

HMRC can treat businesses as associated where one is under the dominant influence of another and they are closely bound by financial, economic and organisational links. Artificially splitting a business to remain below £150,000 can lead to refusal, assessment and penalties.

How to apply

Apply through the VAT online account or form VAT600FRS. State the chosen business sector and expected turnover. Wait for HMRC’s confirmation and effective date before using the flat-rate calculation.

Choosing the correct percentage

Select the category that most closely describes the main activity by turnover. A Companies House SIC code is not decisive. If the business has several activities, forecast which supplies generate the largest turnover and keep the reasoning.

Limited cost business

Even after joining, test each VAT period whether relevant goods are less than both 2% of VAT-inclusive turnover and £1,000 a year (prorated) where the 2% test is exceeded. A limited cost business uses 16.5% rather than its sector rate.

Services, capital expenditure, food and drink, vehicles and fuel in many cases do not count as relevant goods.

First-year discount

A business in its first year of VAT registration can normally reduce the applicable percentage by one percentage point until the day before its first registration anniversary. Joining Flat Rate later does not restart the discount.

When must the business leave?

At the anniversary review, leave if total business income exceeds £230,000 including VAT. Also leave if expected income in the next 30 days alone will exceed £230,000. Total income for exit can be broader than taxable turnover used for entry.

Businesses that may not benefit

• limited cost service businesses subject to 16.5%;
• businesses with substantial VAT-bearing purchases;
• repayment traders and zero-rated exporters;
• businesses expecting major non-qualifying capital expenditure;
• businesses close to the £230,000 exit threshold;
• partly exempt businesses needing detailed recovery modelling.

Worked comparison

A consultant expects £120,000 taxable turnover excluding VAT and therefore meets the entry limit. But if most costs are software and professional services, relevant goods may be below the limited-cost threshold, producing a 16.5% rate. Compare the flat-rate payment with normal output VAT less recoverable input VAT before applying.

Compatibility with Annual Accounting

An eligible business can often combine Flat Rate with Annual Accounting. Annual Accounting has a £1.35 million entry threshold, but the lower Flat Rate £150,000 test still controls Flat Rate entry.

Records

• 12-month turnover forecast;
• HMRC approval and start date;
• sector selection analysis;
• limited-cost calculation each period;
• VAT-inclusive turnover reports;
• capital-goods purchases and input-tax exceptions;
• anniversary and 30-day exit tests.

Eligibility checklist

1. Confirm VAT registration.
2. Forecast taxable turnover at £150,000 or less.
3. Check exclusion and association rules.
4. Choose the defensible sector percentage.
5. Test 16.5% limited-cost status.
6. Model normal VAT versus Flat Rate.
7. Apply and wait for HMRC’s effective date.
8. Monitor the £230,000 exit tests.

Read the Flat Rate Scheme overview.

Official guidance

• HMRC: Flat Rate eligibility
• VAT Notice 733

This guide is general information. Eligibility, association and sector selection require factual analysis.