Once you register for VAT, you don't just pick a rate and get on with it. HMRC offers several ways to account for the VAT you owe, and the one you choose affects your cash flow, your admin time and, in some cases, the actual amount you hand over.
Most small businesses default to the Standard scheme without realising there are alternatives. That can be the right call, but it can also leave money on the table or create unnecessary paperwork.
This guide walks through the four main VAT schemes for UK businesses: Standard, Cash Accounting, Flat Rate and Annual Accounting. We'll cover who each one suits, the turnover thresholds, two illustrative worked examples, and a simple way to decide. It's written for small business owners, ecommerce sellers and contractors who want a clear answer rather than a wall of HMRC jargon.
What are the main VAT schemes in the UK?
A VAT scheme is simply the method you use to work out and report VAT to HMRC. The headline rates don't change between schemes. For 2025/26 the standard rate is 20%, the reduced rate is 5% and the zero rate is 0%. What changes is the timing, the calculation, or how often you file.
You generally have to register for VAT once your VAT taxable turnover passes the registration threshold of £90,000 in any rolling 12-month period (current, from 1 April 2024). You can also register voluntarily below that.
The four schemes we cover here can be mixed in some cases. For example, you can combine Cash Accounting with Annual Accounting. The Flat Rate Scheme is the main exception, as it has its own built-in rules. We'll flag those combinations as we go.
One rule applies to everyone, whichever scheme you pick: Making Tax Digital (MTD) for VAT is mandatory for all VAT-registered businesses. You must keep digital records and file returns through MTD-compatible software.
How does the Standard VAT scheme work?
The Standard scheme is the default. You account for VAT on an accrual (invoice) basis and file a return every quarter.
In practice that means:
- You add VAT to your sales invoices and record it as "output VAT" on the date you raise the invoice, not the date you get paid.
- You reclaim the VAT on your purchases ("input VAT") on the date you receive the supplier's invoice, not when you pay it.
- Each quarter you pay HMRC the difference between output VAT and input VAT (or claim a refund if input VAT is higher).
The Standard scheme suits businesses that reclaim a lot of input VAT, get paid quickly, or have customers who pay on time. The main drawback is cash flow. If a customer takes 60 days to pay, you may still owe HMRC the VAT on that invoice before the money has landed in your account.
If you sell goods and reclaim VAT regularly, for example an ecommerce business buying stock, the Standard scheme often works in your favour. You can read more about how we support online sellers on our ecommerce accounting page.
What is the Cash Accounting Scheme?
The Cash Accounting Scheme changes the timing. Instead of accounting for VAT when you raise or receive an invoice, you account for it when money actually moves.
- You pay VAT on a sale only once your customer pays you.
- You reclaim VAT on a purchase only once you've paid your supplier.
This is a genuine cash-flow help if your customers are slow payers, because you never owe HMRC VAT on an invoice you haven't been paid for. If a customer never pays, you don't have to claim bad debt relief separately, because you never accounted for the VAT in the first place.
The trade-off cuts the other way if you buy a lot on credit or carry stock you haven't paid for, since you can't reclaim that input VAT until you've settled the supplier.
The thresholds are generous:
- You can join if your estimated VAT taxable turnover is £1.35 million or less.
- You must leave once your VAT taxable turnover goes above £1.6 million.
A few exclusions apply. You can't use Cash Accounting alongside the Flat Rate Scheme, and certain transactions (such as those with payment terms of six months or more, advance invoices, and lease or hire purchase arrangements) must still be accounted for the standard way.
What is the Flat Rate Scheme?
The Flat Rate Scheme (FRS) is designed to simplify the sums for smaller businesses. Instead of tracking the VAT on every purchase, you pay HMRC a fixed percentage of your gross (VAT-inclusive) turnover. The percentage depends on your trade sector.
Here's the part that catches people out: you still charge your customers the normal 20% VAT, but you only hand a flat percentage of your gross takings to HMRC. The difference can stay in the business. In exchange, you generally can't reclaim VAT on purchases, apart from certain capital assets costing £2,000 or more.
Key features:
- You can join if your estimated VAT taxable turnover is £150,000 or less (excluding VAT) in the next 12 months.
- You get a 1% discount on your flat rate percentage during your first year as a VAT-registered business.
- The flat rate depends on your sector. For example, the published rates include 14.5% for accountancy or bookkeeping, 14.5% for computer and IT consultancy, 13% for hairdressing and other beauty treatment services, 12.5% for catering including restaurants and takeaways, and 4% for retailing food, confectionery, tobacco, newspapers or children's clothing.
There's an important catch for service businesses with low costs. If you're a "limited cost business", you must use a flat rate of 16.5% regardless of your sector. You're a limited cost business if your spend on relevant goods (not services) is either less than 2% of your turnover, or more than 2% but less than £1,000 a year. That 16.5% rate wipes out most of the benefit, so the FRS rarely suits low-cost consultancies and contractors once the limited cost rules bite.
Contractors weighing this up can find more tailored guidance on our contractor accounting page.
What is the Annual Accounting Scheme?
The Annual Accounting Scheme is about reducing admin and smoothing payments. Instead of four quarterly returns, you file one VAT return a year and make advance payments towards the bill across the year.
How it works:
- You make advance payments based on your previous year's VAT (or an estimate if you're new to VAT). You can pay monthly (nine payments of 10% of your estimated bill, due at the end of months 4 to 12) or quarterly (three payments of 25%, due at the end of months 4, 7 and 10).
- You submit one annual VAT return and settle the balance. The return and any balancing payment are due within two months of the end of your accounting year.
You can join if your estimated VAT taxable turnover is £1.35 million or less, and you must leave once turnover is, or is likely to be, more than £1.6 million at the end of the year.
The main benefit is fewer deadlines and more predictable cash flow. The main drawback is that if you're usually in a refund position (your input VAT regularly exceeds your output VAT), you'll only get one refund a year rather than four. For that reason it tends to suit profitable service businesses more than VAT-reclaiming traders.
You can combine Annual Accounting with Cash Accounting, which many small service businesses do.
VAT schemes compared at a glance
| Scheme | Join threshold | Leave threshold | Returns per year | Best for |
|---|---|---|---|---|
| Standard | No upper limit | No upper limit | 4 | Businesses reclaiming lots of input VAT, paid promptly |
| Cash Accounting | £1.35m or less | Above £1.6m | 4 | Businesses with slow-paying customers |
| Flat Rate | £150,000 or less | When you're no longer eligible (HMRC review) | 4 | Small businesses with low VATable costs (subject to the 16.5% limited cost rate) |
| Annual Accounting | £1.35m or less | Above £1.6m | 1 | Service businesses wanting less admin and steady payments |
All figures are current thresholds. The 20% standard, 5% reduced and 0% zero rates apply across every scheme for 2025/26.
Worked example: does the Flat Rate Scheme save money?
Illustrative example. Tom runs a small IT consultancy as a sole trader. He's just registered for VAT voluntarily and expects VAT-inclusive sales of £96,000 in his first year (that's £80,000 of fees plus £16,000 of VAT at 20%). His business costs are mostly his own time and a bit of software, so he's a limited cost business. He buys very little in the way of goods.
Under the Standard scheme, Tom charges £16,000 of output VAT. Say he reclaims £600 of input VAT on his software and equipment over the year. He pays HMRC:
£16,000 - £600 = £15,400 for the year.
Under the Flat Rate Scheme, Tom is a limited cost business, so his rate is 16.5%, with a 1% first-year discount taking it to 15.5%. He applies that to his gross (VAT-inclusive) turnover of £96,000:
£96,000 x 15.5% = £14,880 for the year.
He can't reclaim his £600 of input VAT under the FRS (it's below the £2,000 capital asset limit), so the comparison is £15,400 against £14,880. In this case the FRS saves Tom roughly £520 in year one, mostly because of the first-year discount.
But watch what happens in year two, once the discount ends and the rate is the full 16.5%:
£96,000 x 16.5% = £15,840, against £15,400 on the Standard scheme.
Now the FRS costs Tom about £440 more. This is exactly why the limited cost rate matters, and why the right scheme can flip from one year to the next. Run the numbers on your own figures before you commit, or ask an accountant to model it. You can also sanity-check your self-employed tax position with our self-employed tax calculator.
How do I choose the right VAT scheme?
There's no universally "best" scheme. The right one depends on how you get paid, what you spend, and how much admin you can stomach. A simple way to work through it:
- Do your customers pay slowly? If invoices regularly sit unpaid for weeks, Cash Accounting protects your cash flow. You won't owe HMRC VAT before you've been paid.
- Do you reclaim a lot of input VAT? If you buy stock, equipment or materials with VAT on them, the Standard scheme usually wins, because the Flat Rate Scheme limits what you can reclaim.
- Are you a low-cost service business? If so, check the Flat Rate Scheme carefully. The 16.5% limited cost rate often removes the benefit, so model both before joining.
- Do you want fewer deadlines? Annual Accounting cuts four returns down to one and smooths your payments, which suits steady, profitable service businesses that aren't usually due refunds.
- Are you over the thresholds? Cash and Annual Accounting cap out at £1.6 million turnover; the Flat Rate Scheme is aimed at businesses with £150,000 or less.
For many of our clients the answer is a combination, such as Cash Accounting plus Annual Accounting. Whatever you choose, the registration mechanics and ongoing MTD filing are the same, and getting the choice right early saves you switching later.
Sole traders and limited companies often land on different schemes for the same trade, so it's worth comparing. See our pages for sole traders and limited companies for niche-specific guidance.
Not sure which VAT scheme fits your business? Book a free 20-minute call with a Zmartly accountant and we'll model the options against your real numbers. Explore our tax advisory services or bookkeeping support to get started.
FAQs
Can I be on more than one VAT scheme at once?
Yes, some schemes combine. You can use Cash Accounting and Annual Accounting together, which is common for smaller service businesses. The Flat Rate Scheme is the main exception, as it has its own built-in method and can't be paired with Cash Accounting.
Do VAT rates change depending on the scheme?
No. The VAT rates are the same across all schemes. For 2025/26 the standard rate is 20%, the reduced rate is 5% and the zero rate is 0%. What changes between schemes is the timing, the calculation method, or how often you file.
Is the Flat Rate Scheme always cheaper?
No. It can save money for some businesses, but the 16.5% limited cost rate applies to many low-cost service businesses and often removes the benefit. You also generally can't reclaim VAT on purchases under the scheme. Always compare the numbers against the Standard scheme before joining.
What turnover do I need to register for VAT?
You must register once your VAT taxable turnover exceeds £90,000 in any rolling 12-month period (current threshold, from 1 April 2024). You can also register voluntarily below that if it suits your business, for example to reclaim input VAT.
Can I leave a VAT scheme later if it stops suiting me?
Yes. You can change schemes, and in some cases you must leave once you cross a turnover limit. Cash and Annual Accounting require you to leave above £1.6 million turnover. It's sensible to review your scheme each year as your turnover and costs change.
