Flat Rate VAT Scheme 2026: Rates, Threshold & Examples

Short answer: the flat rate VAT scheme lets a small VAT-registered business pay HMRC a fixed percentage of its VAT-inclusive turnover instead of working out VAT on every sale and purchase. You can join if you expect turnover of £150,000 or less (excluding VAT) over the next 12 months. Most online shops pay 7.5%, with 1% off in the first year. The catch: if you spend little on goods, you’re a “limited cost business” and pay 16.5%, which saves almost nothing.

This guide is for UK sellers who are already registered for VAT, or about to be: Etsy makers, Shopify and WooCommerce stores, eBay and Vinted resellers, and people selling digital downloads. If you haven’t registered yet, start with how to register for VAT, and see the VAT threshold guide for when you have to.

Should I use the Flat Rate Scheme?

Your situation	Flat Rate Scheme?	Why
Maker selling standard-rated goods, materials under about half of your sales	Usually yes	The flat rate is lower than the VAT you’d hand over after reclaiming
Maker with high material costs (more than about half of your sales)	Usually no	You’d give up more reclaimable VAT than you’d save
Reseller buying new stock from VAT-registered wholesalers	Usually no	You lose the VAT reclaim on your stock, which is your biggest cost
Reseller of second-hand goods bought from private sellers	Compare it with the margin scheme	Depends on your margin. See example 2
Digital downloads, templates, presets, e-courses	Usually no	You almost always fail the limited cost test and pay 16.5%
Mostly zero-rated sales (children’s clothes, books, most food)	No	You pay a percentage on sales that carry no VAT at all
Big start-up spend, or you often get VAT refunds	No	You can’t reclaim VAT on stock or most purchases
Turnover over £150,000 (excluding VAT)	Can’t join	Over the joining threshold

The rest of this guide shows the arithmetic behind each row.

What is the flat rate VAT scheme?

Under normal (standard) VAT accounting, you add up the VAT you charged customers, take off the VAT you paid on business costs, and pay HMRC the difference.

On the Flat Rate Scheme, you still charge your customers VAT at the normal rate, usually 20%. But when you work out what to pay HMRC, you ignore the VAT you charged and ignore the VAT you paid. You take your total sales including VAT and multiply by the flat rate percentage for your type of business. The difference between the VAT you collected and the flat rate amount is yours to keep, and it’s taxable profit for income tax or corporation tax.

A quick example. A jewellery shop on the 7.5% rate sells £12,000 of goods in a quarter, VAT included. It collected £2,000 of VAT (£12,000 × 1/6). On the Flat Rate Scheme it pays HMRC £12,000 × 7.5% = £900. It keeps the other £1,100, but can’t reclaim the VAT on its silver, packaging or software.

The scheme is set out in HMRC’s VAT Notice 733. HMRC designed it to save small businesses paperwork, not money, and it says the scheme doesn’t suit businesses that usually get VAT repayments.

Flat rate VAT threshold: joining and leaving

	Limit	Measured
Join	£150,000 or less	Expected VAT taxable turnover in the next 12 months, excluding VAT
Leave (annual test)	More than £230,000	Total income in the year to your scheme anniversary, including VAT
Leave (30-day test)	More than £230,000	Expected income in the next 30 days alone, including VAT
Stay after a one-off spike	£191,500 or less	If HMRC agrees your income in the next 12 months won’t go over this

All four figures are in VAT Notice 733 (sections 3.1, 3.5, 11.2 and 12.2). Notice that the joining test excludes VAT and the leaving test includes it, and the leaving test also counts exempt income. There’s no separate “flat rate VAT limit” beyond these.

Who can’t join

Even under £150,000, you can’t use the scheme if you (VAT Notice 733, section 3.6):

use the second-hand margin scheme or the auctioneers’ scheme
are “associated” with another business, for example a second company run by the same people that is closely bound to yours financially and organisationally
are, or in the last 24 months were, in a VAT group or eligible to join one
left the Flat Rate Scheme in the last 12 months
were convicted of a VAT offence or charged a penalty for dishonest conduct in the last 12 months

When you must leave

Check your turnover at least once a year, and monthly if you’re growing fast. If your income goes over £230,000 in the year to your anniversary, you leave at the end of the VAT period that contains the anniversary. If you expect more than £230,000 in the next 30 days alone, you leave from the start of those 30 days. You also leave if you switch to the margin scheme. Once you’ve left, you can’t rejoin for 12 months.

Watch this date: the Autumn Budget 2026 is on 28 October 2026. The percentages and thresholds on this page are the ones in force on that date. We’ll update the page if the Budget changes them.

Flat rate VAT percentages for online sellers

HMRC publishes the full list of flat rate percentages by business type. These are the ones online sellers usually choose between:

Type of business (HMRC wording)	Flat rate	First year of VAT registration	Typical online seller
Retailing food, confectionery, tobacco, newspapers or children’s clothing	4%	3%	Baby and kids’ clothing shops, sweet and snack boxes
Retailing vehicles or fuel	6.5%	5.5%	Car parts dealers (rarely online sellers)
Retailing not listed elsewhere	7.5%	6.5%	Most online shops: homeware, gifts, jewellery, adult clothing, resellers
Retailing pharmaceuticals, medical goods, cosmetics or toiletries	8%	7%	Skincare, soap and beauty shops
Wholesaling not listed elsewhere	8.5%	7.5%	Selling mainly to other shops
Manufacturing yarn, textiles or clothing	9%	8%	Clothing brands that make their own garments
Manufacturing food	9%	8%	Bakers, chocolatiers, jam makers
Manufacturing not listed elsewhere	9.5%	8.5%	Makers: candles, ceramics, furniture, prints
Publishing	11%	10%	Self-publishers
Photography	11%	10%	Photographers selling prints and shoots
Any other activity not listed elsewhere	12%	11%	The last resort if nothing else fits
Limited cost business (any sector)	16.5%	15.5%	Digital products, and anyone who spends very little on goods

Choosing your sector

Pick the sector that best describes what your business will mostly do in the coming year, judged by turnover. You use one rate for everything; you can’t split your sales across two rates (VAT Notice 733, sections 4.1 and 4.8).

Makers often sit between two rows. A candle maker who sells only to the public could argue for “Retailing not listed elsewhere” (7.5%) or “Manufacturing not listed elsewhere” (9.5%). HMRC says it won’t change a reasonable choice later, so write down why you picked your sector and keep that note with your VAT records (section 4.2). If you’re unsure, an accountant can tell you how HMRC tends to view businesses like yours.

The 1% first-year discount

In your first year of VAT registration, you take 1% off your flat rate. The year runs from your VAT registration date, not the date you joined the scheme, and it ends the day before the first anniversary. So if you register on 1 November 2026 and join the scheme in March 2027, you only get the discount until 31 October 2027. You lose it altogether if you registered more than 12 months after you should have (section 4.7).

What counts as flat rate turnover?

Your flat rate turnover is everything you sell, including VAT. That catches people out in two ways: it’s the gross figure, and it includes sales that carry no VAT at all.

Include	Leave out
Standard-rated sales, with the VAT	Bank interest and private income
Zero-rated sales, such as children’s clothing, books and goods you export	Sales that are outside the scope of UK VAT, such as digital products sold to overseas consumers
Exempt income, such as rent	Sales of capital items you reclaimed VAT on (charge normal VAT on these)
Delivery charges you add to orders	Services you buy from abroad under the reverse charge (handled outside the scheme)
Sales of capital items you didn’t reclaim VAT on	Import VAT you account for under postponed accounting

Sources: VAT Notice 733, sections 6.2 to 6.5.

Zero-rated sales are the big trap. A shop selling £20,000 of children’s clothes pays 4% on that £20,000, even though it charged its customers no VAT. Physical goods you post abroad are zero-rated exports, so the same applies to them. HMRC’s notice warns that if your zero-rated or exempt sales are a bigger share of your turnover than is normal for your sector, you’ll pay more on the scheme.

Gross, not net. Putting a figure without VAT on your return is one of the common errors HMRC lists (section 7.7). If your accounting software asks for “sales”, check whether it means with or without VAT.

The limited cost trader test and the 16.5% rate

Since 1 April 2017, businesses that spend very little on goods pay a flat 16.5%, whatever sector they’re in. HMRC introduced it to stop people using the scheme to keep VAT they’d charged when they had almost no costs.

You’re a limited cost business for a VAT period if your spending on “relevant goods”, including VAT, is either:

less than 2% of your VAT-inclusive flat rate turnover for the period, or
more than 2%, but less than £1,000 a year, which is £250 a quarter

You test it every VAT return, using that period’s figures (VAT Notice 733, section 4.4). If you’re close to the line, you can be on your sector rate one quarter and 16.5% the next.

What counts as relevant goods

Relevant goods are goods (not services) that you use only for your business.

Counts	Doesn’t count
Stock for a shop, if selling is your main activity	Any services: marketplace fees, ads, accountancy, rent, postage
Raw materials: wax, clay, fabric, yarn, beads	Capital items of any value, such as a laptop, phone or printer
Packaging, labels, stationery	Downloads, downloaded software and bespoke software
Cleaning products	Food and drink for you or your staff
Gas and electricity used only for the business	Vehicle costs and fuel (unless you’re in transport)
Software on a physical disc	Gifts, samples and promotional items
	Goods bought just to pass the test

The arithmetic

Take three sellers, each with a quarter’s VAT-inclusive turnover:

Seller	Quarterly turnover	2% of turnover	Spend on relevant goods	Passes both tests?	Rate
Candle maker	£30,000	£600	£8,200 (wax, jars, boxes)	Yes: over £600 and over £250	Sector rate
Knitting pattern seller, mostly PDFs	£10,000	£200	£240 (printed patterns, mailers)	No: over £200 but under £250	16.5%
Digital planner seller	£28,500	£570	£100 (paper, ink)	No: under both	16.5%

The pattern seller spends more than 2% of her turnover on goods, but less than £250 in the quarter, so the £250 floor catches her. Buying extra goods just to get over the line doesn’t work: HMRC ignores them.

Why 16.5% leaves almost nothing

On a sale at 20% VAT, the VAT is 1/6 of the price you charge, which is 16.67% of your VAT-inclusive turnover. At 16.5%, you hand over all but 0.17% of it. On £100,000 of sales that’s £167 a year, and in exchange you give up reclaiming VAT on everything except big capital purchases. Seen another way, 16.5% of gross is 19.8% of your net sales. For most limited cost businesses, standard accounting is cheaper.

Capital assets of £2,000 or more

The one main purchase you can still reclaim VAT on is a single purchase of capital goods costing £2,000 or more, including VAT. You claim it in box 4 of your return, outside the flat rate calculation (VAT Notice 733, section 15).

It must be goods, not services. A website build or a design project doesn’t count.
It must be one purchase. Items bought from one supplier at the same time count together. Two £1,200 machines bought from two shops a month apart don’t.
It can’t be stock, materials you’ll build into products, or things you’ll use up within a year.

Example: a ceramicist on the scheme buys a £2,400 kiln, VAT included. She reclaims £400 (£2,400 × 1/6) on her next return. If she’d bought a £1,800 laptop instead, she’d get nothing back. If she later sells the kiln, she charges normal VAT on the sale, outside the scheme.

Buying computer equipment worth £50,000 or more, or property worth £250,000 or more, puts you in the Capital Goods Scheme and you have to leave the Flat Rate Scheme.

When the Flat Rate Scheme beats standard accounting

For a business that sells only standard-rated goods, there’s a simple test. The VAT you collect is 16.67% of your VAT-inclusive sales. On standard accounting you pay that, less the VAT on your costs. On the Flat Rate Scheme you pay your flat rate. So the scheme wins when the VAT on your costs is smaller than the gap.

Your flat rate	Gap (16.67% minus your rate)	Scheme wins if VAT-able costs (incl. VAT) are under
6.5% (retail, first year)	10.17%	about 61% of sales
7.5% (retail)	9.17%	about 55% of sales
8.5% (manufacturing, first year)	8.17%	about 49% of sales
9.5% (manufacturing)	7.17%	about 43% of sales
16.5% (limited cost)	0.17%	about 1% of sales

“VAT-able costs” means costs that carry 20% UK VAT you could reclaim under standard accounting: materials, packaging, equipment, UK-billed software and so on. Leave out costs that carry no VAT, such as stock bought from private sellers and wages.

It changes when:

Some of your sales are zero-rated or exported. You collect less VAT, but you pay the flat rate on the full amount, so the scheme looks worse.
You make a big purchase. A year when you buy lots of stock or equipment under £2,000 is a year the scheme costs you more.
You’re in your first year. The 1% discount moves the line in your favour.

When the Flat Rate Scheme loses

Makers with high material costs, such as a furniture maker spending 60% of sales on timber and hardware.
Resellers of new goods bought from VAT-registered wholesalers or brands. The VAT on stock is your biggest reclaim, and the scheme takes it away.
Digital product sellers. Templates, presets, fonts and e-courses need almost no goods, so you’ll usually pay 16.5%.
Sellers of zero-rated goods. A second-hand bookshop or children’s clothing brand charges 0% VAT, but pays 4% to 7.5% of everything it sells on the scheme.
Heavy buying years. On standard accounting a new business stocking up often gets a refund. On the scheme it can’t.

Worked examples

Example 1: an Etsy candle maker

Rowan makes soy candles in Norwich and sells on Etsy and her own Shopify site. She’s been VAT-registered for two years and uses “Manufacturing not listed elsewhere” (9.5%). Her year:

Sales, including VAT and delivery charges: £120,000
VAT she collected: £120,000 × 1/6 = £20,000
VAT-able costs (wax, jars, wicks, fragrance oils, boxes, UK-billed software), including VAT: £36,000, so £6,000 of VAT

	Standard accounting	Flat Rate Scheme (9.5%)
VAT to HMRC	£20,000 − £6,000 = £14,000	£120,000 × 9.5% = £11,400

Rowan’s costs are 30% of her sales, under the 43% line, so the scheme saves her £2,600 a year. Her spend on wax and jars is far more than 2% of turnover, so she isn’t a limited cost business. If she’d picked 7.5% retail instead, she’d pay £9,000 and save £5,000, which is why it’s worth recording the reasoning for her sector.

Now say Rowan switches to hand-blown glass vessels and her VAT-able costs rise to £60,000 (£10,000 of VAT). Standard accounting drops to £10,000, and the scheme at 9.5% still costs £11,400. She’d be £1,400 a year worse off on the scheme.

Rowan’s sales to US customers count too. If £6,000 of her £120,000 is candles posted to the US, she charged no VAT on them, but they’re still in her flat rate turnover and cost her £570 in flat rate VAT.

Example 2: a Vinted and eBay reseller

Dan sells vintage sportswear on eBay and Vinted from Manchester. He buys stock at car boot sales, house clearances and from private sellers on Vinted, so he pays no VAT on it. He crossed the threshold this year. His year:

Sales, including delivery charges: £114,000
Stock bought from private sellers: £38,000
VAT-able overheads (mailers, a steamer, rail hire, UK-billed software): £6,000, so £1,000 of VAT

Dan has three options:

	Standard accounting	Margin scheme	Flat Rate Scheme (7.5%)
How VAT is worked out	1/6 of all sales	1/6 of the margin on each item	7.5% of all sales
VAT on sales	£114,000 × 1/6 = £19,000	(£114,000 − £38,000) × 1/6 = £12,667	£114,000 × 7.5% = £8,550
Less VAT on overheads	− £1,000	− £1,000	not allowed
VAT to HMRC	£18,000	£11,667	£8,550

The margin scheme figure assumes every item sells for more than Dan paid; in practice each item is worked out separately and a loss on one can’t reduce the VAT on another. Standard accounting is clearly the worst option for him, because he has no VAT on his stock to reclaim.

HMRC’s notice says second-hand sellers generally pay more VAT on the Flat Rate Scheme than on the margin scheme, and for many dealers that’s true. But it depends on your margin. Dan’s margin is two-thirds of his selling price, so 7.5% of his sales is less than 1/6 of his margin. In his first year at 6.5%, the scheme costs him just £7,410. He also skips the item-by-item stock book.

Compare Amira, who resells designer handbags. She buys at around £300 and sells at around £400, so her margin is a quarter of the selling price. On £120,000 of sales with £90,000 of purchases, the margin scheme costs her (£30,000 × 1/6) = £5,000, and the Flat Rate Scheme costs £9,000.

The rule of thumb: at 7.5%, the margin scheme is cheaper when your margin is less than about 45% of your selling price. At 6.5% in your first year, the line is about 39%. Second-hand children’s clothes are zero-rated, so for those the flat rate loses either way. Our margin scheme guide covers the records you need.

Example 3: a digital download seller

Priya sells printable planners and photo-editing presets from Leeds, through Etsy and her own site. Her year:

UK sales, including VAT: £114,000 (VAT collected: £19,000)
Sales to customers outside the UK: £30,000. Digital products sold to overseas consumers are outside the scope of UK VAT, so they’re left out of her flat rate turnover
Relevant goods: £400 a year of paper and ink
VAT-able costs: an £1,800 laptop, software subscriptions billed in the UK and her accountant’s fees, with £1,100 of VAT in total

Limited cost test: a quarter’s turnover is £28,500, so 2% is £570. Priya spends £100 a quarter on relevant goods, under both £570 and £250. Software, the laptop and her accountant don’t count. She’s a limited cost business.

	Standard accounting	Flat Rate Scheme (16.5%)
VAT to HMRC	£19,000 − £1,100 = £17,900	£114,000 × 16.5% = £18,810

The scheme costs her £910 more. In her first year at 15.5% it would cost £17,670, saving just £230, and that saving disappears in any year she buys more equipment. The laptop isn’t a £2,000 capital purchase, so she can’t reclaim its VAT on the scheme. Standard accounting is the better long-term choice. Her overseas sales are taxed where her customers are; see the non-Union OSS guide.

Etsy, eBay, Amazon and other marketplaces

You account for the VAT, not the marketplace. If you’re a UK-based seller, Etsy, eBay, Amazon, Vinted and TikTok Shop don’t collect UK VAT on your UK sales for you. The marketplace collection rules only apply to overseas sellers (see marketplaces in the threshold guide).
Use the order value, not your payout. Your flat rate turnover is what customers paid, including delivery charges, before the marketplace takes its fees. Your payout is lower, so don’t use it.
Fees are services. VAT on marketplace fees and ads can’t be reclaimed on the scheme, and fees never count as relevant goods for the limited cost test. If a platform bills you from outside the UK under the reverse charge, you record that VAT in boxes 1 and 4 as you would on standard accounting, so it nets to zero (VAT Notice 733, section 6.4).
A possible change. In June 2026 HMRC and the Treasury consulted on making marketplaces liable for VAT on UK businesses’ sales to consumers, probably only above a £90,000-per-platform threshold. The consultation closed on 18 August 2026 and no decision had been published when we checked. If it goes ahead, it would change how scheme users on marketplaces account for VAT, and we’ll update this guide.

Invoices and records on the scheme

Your customers shouldn’t notice anything. You charge VAT at the normal rate (20%, 5% or 0%) and give VAT-registered customers a normal VAT invoice. Never put your flat rate percentage on an invoice. The usual invoicing rules apply.

For each return, keep a record of your flat rate turnover, the percentage you used, the VAT you calculated, and what you spent on relevant goods for the limited cost test (VAT Notice 733, section 7.2). You still file through Making Tax Digital software.

How to join and leave

When you register. The online VAT registration lets you ask to join at the same time. See choosing a VAT scheme.
Later. Apply with form VAT600FRS, or VAT600AA/FRS to join the Annual Accounting Scheme too. HMRC writes to confirm your start date.
Leaving. You can leave at any time by writing to HMRC. When you leave, you may be able to reclaim VAT on stock you still hold, under the optional stock adjustment in section 12 of the notice. You can’t rejoin for 12 months, so run the numbers before you switch back and forth.

How GoodVat helps

Whether the Flat Rate Scheme saves you money depends on numbers most sellers don’t have to hand: VAT-inclusive turnover by channel, how much of it is zero-rated or exported, and what you spend on goods versus services. GoodVat:

Brings your sales together from Shopify, WooCommerce, Etsy, Amazon and other connected channels, or from your exports for platforms we don’t connect to yet, such as Vinted and eBay
Tracks your turnover against the £90,000 registration threshold and the scheme’s £150,000 and £230,000 limits
Registers you for VAT and files your Making Tax Digital returns
Calculates the right VAT for every product, including zero-rated items, and sends compliant invoices

We don’t give regulated tax advice, but we’ll show you the numbers so you or your accountant can choose.

FAQ

What is the flat rate VAT scheme threshold?

You can join the Flat Rate Scheme if you expect your VAT taxable turnover, excluding VAT, to be £150,000 or less in the next 12 months. You must leave if your total income including VAT goes over £230,000 in the year to your scheme anniversary, or if you expect it to go over £230,000 in the next 30 days alone.

What is the flat rate VAT percentage for online retailers?

Most online shops selling physical goods use ‘Retailing not listed elsewhere’ at 7.5%. Shops selling food, confectionery or children’s clothing use 4%, and shops selling cosmetics or toiletries use 8%. If you spend very little on goods, you’re a limited cost business and pay 16.5% whatever your sector. In your first year of VAT registration, you take 1% off your rate.

Is the flat rate VAT worked out on the net or gross amount?

On the gross amount. You multiply your flat rate percentage by your VAT-inclusive turnover, which includes zero-rated and exempt sales. Using a figure without VAT is one of the most common mistakes HMRC sees on Flat Rate Scheme returns.

What is a limited cost trader?

A business whose spending on goods used only for the business, including VAT, is less than 2% of its VAT-inclusive turnover, or more than 2% but less than £1,000 a year (£250 a quarter). Services, capital items, vehicle costs, food and drink, and downloads don’t count. A limited cost trader pays 16.5%, which leaves almost no saving.

Can I reclaim VAT on purchases on the Flat Rate Scheme?

Mostly no. The flat rate already allows for VAT on your costs. The main exception is a single purchase of capital goods costing £2,000 or more including VAT, such as a laser cutter or kiln, which you reclaim in the normal way. VAT on stock, materials and services can’t be reclaimed.

Is the Flat Rate Scheme worth it for Etsy sellers?

Often yes for makers with modest material costs. At 7.5%, the scheme beats standard VAT accounting when your VAT-able costs are under about 55% of your VAT-inclusive sales. At 9.5%, the cut-off is about 43%. It’s rarely worth it for digital sellers, who usually pay 16.5%, or for sellers of zero-rated goods such as children’s clothes or books.

Can I use the Flat Rate Scheme and the margin scheme together?

No. You can’t use the Flat Rate Scheme and the second-hand margin scheme at the same time. If you start using the margin scheme, you have to leave the Flat Rate Scheme from the start of that VAT period, and you can’t rejoin for 12 months.

VAT margin scheme for second-hand goods: the alternative for resellers, with the records you need
How to register for VAT: step by step, including choosing a scheme
VAT threshold 2026: when you have to register, and what counts
Selling to UK customers: VAT rates, invoices and quarterly returns
Etsy tax for UK sellers: income tax, HMRC reporting and VAT on Etsy fees
Non-Union OSS for digital services: EU VAT on downloads sold from the UK
UK VAT setup checklist: what to do once you’ve registered