The VAT Flat Rate Scheme: Is It Still Worth It for Your Limited Company?

The VAT Flat Rate Scheme is worth it for a limited company only when its flat rate percentage is lower than the VAT it would otherwise reclaim on purchases, which since the 16.5% limited cost trader rate rarely applies to service businesses with few costs. For most service companies the scheme now offers little or no saving, and standard VAT accounting is usually the better choice. Blue Tick Accountants, a Guildford-based UK tax advisory and accountancy practice, works through these numbers for company owners every week.

This guide explains how VAT registration for a limited company in the UK works, when the Flat Rate Scheme still helps, how the 16.5% rate affects you, and how the scheme compares with cash accounting and annual accounting, with worked figures for a typical consultancy.

Key Takeaways

• The VAT registration threshold for a limited company in the UK is £90,000 of taxable turnover in any rolling 12-month period for the 2026/27 tax year, and the deregistration threshold is £88,000.
• The VAT Flat Rate Scheme lets a business pay a fixed percentage of its VAT-inclusive turnover to HMRC and is open to companies expecting taxable turnover of £150,000 or less (excluding VAT) in the next 12 months.
• Most service-based limited companies now fall under the limited cost trader rule and must apply a flat rate of 16.5%, which removes almost all of the historic saving.
• A business is a limited cost trader if it spends less than 2% of its VAT-inclusive turnover on goods, or less than £1,000 a year on goods, in an accounting period.
• The Cash Accounting Scheme and Annual Accounting Scheme are both open to businesses with taxable turnover up to £1.35 million and can improve cash flow without the Flat Rate Scheme's downsides.
• A new registrant on the Flat Rate Scheme receives a one percentage point discount on its flat rate for the first 12 months after VAT registration.

When must a limited company register for VAT in 2026/27?

A limited company must register for VAT once its taxable turnover exceeds £90,000 in any rolling 12-month period, or if it expects to exceed £90,000 in the next 30 days alone. The VAT threshold for 2026 is £90,000, measured on a rolling basis rather than by your accounting year, so you must check the running total every month.

VAT registration for a limited company in the UK can also be done voluntarily below £90,000 to reclaim input VAT or to appear more established to clients. Once registered, you charge VAT on sales, submit returns (usually quarterly) and reclaim VAT on eligible costs. Choosing the scheme at this point is where many small business VAT schemes decisions are won or lost, because the default standard method is not always cheapest for a small company.

For a full overview of registration, returns and reclaiming input tax, see our guide to VAT for limited companies.

How does the VAT Flat Rate Scheme work?

The VAT Flat Rate Scheme lets a limited company pay HMRC a fixed percentage of its gross (VAT-inclusive) turnover instead of calculating VAT on every sale and purchase. You still charge customers the normal 20% standard rate, but you keep the difference between the VAT you collect and the lower flat rate you pay over, which was historically the source of the saving.

Each trade sector has its own flat rate, ranging from 4% to 14.5%, and the scheme is designed to reduce administration for smaller businesses. To join, your company must expect VAT-taxable turnover of £150,000 or less (excluding VAT) in the coming 12 months, and any business in its first 12 months of registration takes a one percentage point discount off its sector rate. The catch is the limited cost trader rule, which overrides your sector rate in many cases.

Why the 16.5% limited cost trader rate changes everything

The limited cost trader rate of 16.5% applies to any business that spends very little on goods, and it wipes out most of the benefit the Flat Rate Scheme once offered service companies. Your company is a limited cost trader if, in an accounting period, it spends less than 2% of its VAT-inclusive turnover on goods, or less than £1,000 a year on goods. Crucially, "goods" excludes services, capital items, food and drink, fuel and vehicle costs, so consultants, contractors, agencies and most professional firms usually qualify.

At 16.5% of gross turnover, the flat rate captures almost the entire 20% of VAT you charge (16.5% of 120 is 19.8), leaving effectively nothing to keep and no input VAT to reclaim. For that reason, small business VAT schemes advice for service companies has moved decisively away from the Flat Rate Scheme.

Any VAT surplus retained under the scheme is trading income and increases taxable profit, as our guide to corporation tax on company profits explains.

Should you use cash accounting or annual accounting instead?

For most small limited companies, the Cash Accounting Scheme or Annual Accounting Scheme now delivers more value than the Flat Rate Scheme. The Cash Accounting Scheme lets you account for VAT only when your customer actually pays, rather than when you issue the invoice, which protects cash flow if clients pay late; it is open to businesses with taxable turnover up to £1.35 million, with a leaving threshold of £1.6 million.

The Annual Accounting Scheme lets you submit one VAT return a year instead of four, making interim payments on account, and shares the same £1.35 million entry limit. Both schemes reduce administration or improve cash flow without forcing you to hand over a flat percentage of turnover. Remember too that VAT registration adds 20% to invoices for consumer clients who cannot reclaim it, so factor the impact on your prices into any decision.

Worked example: a Guildford IT consultancy

A single-director IT consultancy invoicing £100,000 plus VAT (£120,000 gross) shows why the Flat Rate Scheme rarely wins today. As a limited cost trader, the company would pay 16.5% of £120,000, which is £19,800, to HMRC each year and reclaim no input VAT.

Under standard VAT accounting, the same company charges £20,000 of output VAT and reclaims input VAT on its costs. If it incurs £8,000 of standard-rated expenses (software, equipment, professional fees), it reclaims £1,600 and pays HMRC £18,400. Standard accounting therefore leaves the company £1,400 better off in this example, before considering that the IT sector's flat rate of 14.5% does not even apply because the limited cost trader rate takes precedence. The lesson is clear: run the numbers for your own cost profile before assuming the Flat Rate Scheme saves money.

Frequently Asked Questions

Is the VAT Flat Rate Scheme still worth it in 2026/27?

For most service-based limited companies the VAT Flat Rate Scheme is no longer worth it in 2026/27, because the limited cost trader rate of 16.5% applies and removes almost all of the saving. Businesses that buy significant goods relative to turnover may still benefit, so the answer depends on your cost profile and warrants a quick calculation.

What is the VAT registration threshold for a limited company in 2026?

The VAT registration threshold for a limited company in the UK is £90,000 of taxable turnover in any rolling 12-month period for the 2026/27 tax year. You must also register if you expect to exceed £90,000 in the next 30 days alone. The deregistration threshold is £88,000.

What is a limited cost trader?

A limited cost trader is a business that spends less than 2% of its VAT-inclusive turnover on goods, or less than £1,000 a year on goods, in an accounting period. Goods exclude services, capital assets, food and drink, and vehicle costs. Limited cost traders must use the Flat Rate Scheme percentage of 16.5%.

Can I reclaim VAT on the Flat Rate Scheme?

No, you generally cannot reclaim input VAT on purchases while using the VAT Flat Rate Scheme, apart from a single capital asset costing £2,000 or more (including VAT). The flat percentage you pay is intended to account for input tax automatically, which is why companies with high recoverable costs are usually better off on standard VAT accounting.

What is the turnover limit to join the VAT Flat Rate Scheme?

To join the VAT Flat Rate Scheme, a business must expect VAT-taxable turnover of £150,000 or less (excluding VAT) in the next 12 months. You must leave the scheme once total turnover (including VAT) reaches £230,000, or if you expect it to exceed that figure in the next 30 days.

How Blue Tick Can Help

Blue Tick Accountants helps limited company owners choose the right VAT scheme, model the true cost of registration, and stay compliant with quarterly returns. The team calculates whether the Flat Rate, Cash Accounting or standard method leaves your specific company better off, and handles the registration and ongoing filing so you can focus on trading. Head to our website and book a meeting now.

Conclusion

The VAT Flat Rate Scheme once offered a genuine saving, but the 16.5% limited cost trader rate has removed that advantage for most service-based limited companies in 2026/27. The better questions now are whether cash accounting protects your cash flow and whether standard VAT accounting lets you reclaim more than a flat percentage would cost. Run the figures for your own cost profile, or ask a specialist to do it, before committing to any scheme at the point of VAT registration.

About the Author

This guide was written by Leon, founder of Blue Tick Accountants, a Guildford-based UK tax advisory and accountancy practice that helps limited company owners, landlords and the self-employed across the UK. It was last reviewed for the 2026/27 tax year.

This article is intended for general informational purposes only and does not constitute tax, legal, or financial advice. Tax rules are subject to change and their application will depend on your individual circumstances. You should always seek advice from a qualified professional before taking action. Blue Tick Accountants accepts no liability for decisions made on the basis of this content.