VAT Guide · Updated May 2026
When does the Flat Rate Scheme save you money, when does Standard VAT win, and where is the crossover point? Worked example with industry-specific percentages, plus the "limited cost trader" trap that catches a lot of service businesses out.
You charge 20% VAT on your sales (output VAT). You reclaim 20% VAT on most of your business purchases (input VAT). You pay HMRC the difference each quarter: Output VAT − Input VAT = VAT due.
You charge 20% VAT to customers normally. You pay HMRC a flat percentage of your gross turnover (the VAT-inclusive amount) instead of the input/output difference. You don't reclaim VAT on most purchases — the flat rate is meant to approximate average input VAT recovery for businesses in your sector.
The percentage varies by industry (see table below). The intent is that businesses with high input VAT (high purchases of VAT-able goods) get a lower flat rate; service businesses with low input VAT get a higher flat rate.
Since April 2017, there's a special rate of 16.5% for businesses classified as "limited cost traders". This applies to any FRS business whose VAT-able goods spend is:
"VAT-able goods" specifically excludes:
This rule was designed to catch consultants, IT contractors, marketers and similar service businesses whose costs are almost entirely services (software, accountant fees, training, phone) rather than physical goods. If you fall under this rule, you pay 16.5% of gross turnover — almost always more than you'd pay under Standard VAT.
For most consultants and contractors, the limited cost trader rate effectively killed the FRS appeal in 2017. Unless you happen to buy genuine VAT-able goods (over £1,000/year AND 2% of turnover), the scheme no longer saves money.
A selection of common rates — the full list has 55+ categories on HMRC's website:
| Business type | FRS percentage |
|---|---|
| Accountancy or book-keeping | 14.5% |
| Advertising | 11% |
| Architect, civil & structural engineer or surveyor | 14.5% |
| Building or construction services (labour-only) | 14.5% |
| Computer and IT consultancy or data processing | 14.5% |
| Computer repair services | 10.5% |
| Estate agency or property management | 12% |
| Hairdressing or other beauty treatment | 13% |
| Hotel or accommodation | 10.5% |
| Legal services | 14.5% |
| Management consultancy | 14% |
| Photography | 11% |
| Printing | 8.5% |
| Repairing personal or household goods | 10% |
| Restaurants, cafes, takeaways | 12.5% |
| Retailing food, confectionery, tobacco, newspapers, alcohol | 4% |
| Retailing not listed elsewhere | 7.5% |
| Transport or storage incl. couriers and taxi services | 10% |
| Wholesaling not listed elsewhere | 8.5% |
| Limited cost trader (any sector) | 16.5% |
Add a 1% discount in your first year of VAT registration if you join FRS at the start.
You're an IT consultant. Annual turnover (excl. VAT): £80,000. So gross turnover (incl. VAT): £96,000. Your business expenses for the year:
| Item | Amount |
|---|---|
| Output VAT (20% on £80,000) | £16,000 |
| Input VAT reclaimed (20% on £5,000 of VAT-able expenses) | − £1,000 |
| VAT payable under Standard scheme | £15,000 |
| Item | Amount |
|---|---|
| Gross turnover (incl. VAT) | £96,000 |
| FRS rate: 16.5% | £15,840 |
| VAT payable under FRS | £15,840 |
Standard VAT wins by £840/year. The FRS would only beat Standard VAT for this consultant if they had higher VAT-able expenses (so the input VAT reclaim under Standard grew bigger) or if they didn't qualify as a limited cost trader (rate then drops to 14.5% IT consultancy rate).
| Item | Amount |
|---|---|
| Gross turnover (incl. VAT) | £96,000 |
| FRS rate: 14.5% | £13,920 |
| VAT payable under FRS | £13,920 |
Now FRS wins by £1,080. The difference of £1,920 (between limited cost trader and full IT consultancy rate) is why the limited cost trader rule was so impactful.
The FRS vs Standard decision is small relative to many tax decisions, but it's a recurring saving year after year if you get it right. We model both options based on your actual expenses, then advise — including how the limited cost trader test applies to your situation.
Book a free 20-min callHMRC recommends a yearly check of whether FRS is still optimal. Run the calculation as if you'd been on Standard for the year just finished, compare to what you actually paid on FRS, and switch if Standard would have saved more than the admin time you saved.
Leaving FRS is easy. You notify HMRC in writing (via VAT account online) and your next quarter is on Standard VAT. There's no penalty, no cooldown, no complex paperwork. The only thing you can't do is hop in and out of FRS each quarter — once you leave, you usually need to wait 12 months to rejoin.
HMRC's list of FRS percentages is sector-coded. If your business spans more than one sector, you pick the one that best matches your main activity (greater than 50% of turnover). Where there's genuine ambiguity, "Business services not listed elsewhere" at 12% is the default.