VAT schemes explained: Flat Rate, Cash Accounting and more

Last checked against GOV.UK: 12 October 2026By Artix Bookkeeping

Not sure which one suits you? Try the VAT scheme finder: a few questions, and it shows which schemes you can use and roughly how much VAT each would mean for you.

Standard accounting

You pay the VAT on your sales minus the VAT on your costs, usually with a return every quarter. It is open to every VAT-registered business, and you can reclaim VAT on all your business costs.

Flat Rate Scheme

You pay HMRC a fixed percentage of your turnover including VAT. The percentage depends on your type of business, and you keep the difference between what you charge customers and what you pay HMRC. You cannot reclaim VAT on most purchases, apart from a single capital purchase of £2,000 or more including VAT.

• Who can join: taxable turnover of £150,000 or less a year, excluding VAT.
• When you must leave: total income above £230,000 including VAT.
• Limited cost businesses: if you spend very little on goods (under 2% of your turnover including VAT, or under £1,000 a year), the rate is 16.5%.
• First year: a 1% discount applies until the first anniversary of your VAT registration.

Cash Accounting Scheme

You pay VAT when your customers pay you, and reclaim it when you pay your suppliers, instead of going by invoice dates. This helps if customers are slow to pay, because you never pay VAT on an invoice that is not paid.

• Who can join: taxable turnover of £1.35 million or less a year.
• When you must leave: turnover above £1.6 million.

Annual Accounting Scheme

One VAT return a year instead of four. You pay through the year in instalments (9 monthly payments of 10%, or 3 quarterly payments of 25%) and settle the balance with your return, which is due 2 months after the end of your VAT year. It can be combined with the Flat Rate Scheme or Cash Accounting.

• Who can join: taxable turnover of £1.35 million or less a year.
• When you must leave: turnover above £1.6 million.

Retail schemes

For shops and similar businesses selling to the public at more than one VAT rate. Instead of tracking the VAT on every sale, you work it out from your takings with the Point of Sale, Apportionment or Direct Calculation scheme. They cannot be used with the Flat Rate Scheme. Businesses with turnover above £130 million need a bespoke scheme.

Margin schemes

For second-hand goods, works of art, antiques and collectors’ items. You pay VAT on your margin, the difference between what you paid and what you sold for, instead of on the full selling price. The VAT is one-sixth of the margin.

Also see When and how to register for VAT.

This guide is general information, not personalised tax advice. Rules, thresholds and dates can change, so check GOV.UK or get advice on your own circumstances.