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Flat Rate Scheme vs Standard VAT: What’s Better in 2025/26?

  • JAFA Accountancy
  • Jun 25
  • 3 min read
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If you're VAT-registered or about to be, you’ve got a big decision to make: Flat rate VAT vs standard. We break down the 2025/26 pros, cons, and key numbers for the two main VAT schemes, so you can pick the option that actually benefits your business.


Key Takeaways

  • Flat Rate is simpler but limits VAT reclaim - best for low-expense, service-based businesses.

  • Standard VAT takes more admin but allows full VAT recovery - ideal if you regularly buy stock, tools, or services.

  • The right choice depends on your expenses. Review your setup regularly to avoid overpaying VAT.


Flat Rate vs Standard VAT: What’s the Difference?

The main difference is in how you calculate and pay VAT to HMRC.


Flat Rate Scheme (FRS)

You still charge 20% VAT to customers, but instead of working out VAT on each expense, you just pay HMRC a fixed percentage of your total sales (including VAT). Those official Flat rate Scheme percentages, for example, 14.5% for IT consultants or 14% for management consultants, are set out in the HMRC flat rate scheme tables.


You can’t claim VAT back on most purchases unless it’s a capital asset of over £2,000. However, this method is simpler and saves time on paperwork.


Standard VAT Accounting

You charge 20% VAT, and also track how much VAT you pay on business expenses. Every quarter, you pay HMRC the difference between the VAT you charged on sales and the VAT you paid on eligible purchases.


This lets you reclaim VAT on most costs, but it takes more admin and accurate bookkeeping.



Feature

Flat Rate Scheme

Standard VAT

VAT charged to customers

20%

20%

VAT paid to HMRC

Fixed % of VAT-inclusive turnover (industry-based)

Output VAT minus Input VAT

VAT reclaim on purchases?

❌ No (except capital assets over £2,000)

✅ Yes, on most business expenses

Bookkeeping/admin

Simple

More detailed

Ideal for

Low-expense, service-based businesses

Businesses with high spending on stock, tools, or goods

Eligibility to join (2025/26)

Flat Rate Scheme eligibility: turnover ≤ £150k (ex. VAT)

Must register if turnover > £90,000/year

When you must leave

If turnover > £230,000 (including VAT)

N/A


Pros and Cons of Each Scheme



Flat Rate Scheme

Standard VAT Accounting

Pros

✅ Simple and quick to manage

✅ Predictable VAT payments

✅ 1% discount in your first year

✅ Might keep more cash if you don’t have many expenses

✅ Can reclaim VAT on most business expenses

✅ More accurate - pay VAT on net VAT (sales minus purchases)

✅ Better for product-based or high-expense businesses

Cons

❌ Can’t reclaim VAT on most purchases

❌ Flat rate might not reflect your actual costs

❌ Limited-cost businesses pay a high 16.5% rate

❌ Not ideal if you buy a lot of goods or equipment

❌ More paperwork and detailed tracking

❌ Mistakes can lead to penalties if not handled carefully


Who Should Choose What?

Choose Flat Rate if you’re a service-based business with low expenses and want simpler VAT returns.


Choose Standard VAT if you regularly buy stock, tools, or services and want to reclaim VAT.


If you’re classed as a “limited-cost” business (one that spends very little on goods), Standard VAT is usually the better option.



Not sure which scheme is right for you? We’ll run the numbers and help you make the call. BOOK A FREE CALL with JAFA today and get VAT clarity in minutes.


What We Think

The Flat Rate Scheme can still work for small service businesses, but the 16.5% rate for limited-cost traders makes it less appealing than it used to be.


Standard VAT takes more effort but offers better value if you have regular expenses. With the right tools, it’s easier to manage than most expect.


We think it’s smart to review your VAT setup regularly - switching schemes as your business grows can save more in the long run.


How JAFA Can Help

Not sure if you’re on the right VAT scheme? We’ll crunch the numbers and show you what’s best for your business.


If a switch makes sense, we handle everything from registration to setup.


BOOK A QUICK FREE CALL with our professional team of accountants - no pressure, just answers.

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