VAT schemes explained: which one is right for you?
There are four main UK VAT schemes. Standard (charge VAT, reclaim VAT on costs, pay the difference), Flat Rate (pay a fixed percentage of turnover with simpler admin, for turnover up to £150,000), Cash Accounting (only pay VAT once your customer has paid you, up to £1.35 million), and Annual Accounting (one return a year with instalments, up to £1.35 million). The right one depends on how much VAT you pay on costs and how quickly your customers pay you.
Reviewed July 2026. Figures are correct at the date of review. Always check GOV.UK for the latest.
Standard scheme: the default
You charge 20% on sales, reclaim the VAT on your business purchases, and pay HMRC the difference each quarter. It suits any business with meaningful VAT-able costs to reclaim: a builder buying materials, a shop buying stock, a manufacturer buying equipment. If you spend a lot on VAT-able things, this usually leaves you best off.
Flat Rate scheme: simpler, but read the warning
Instead of tracking VAT on every purchase, you pay a fixed percentage of your gross turnover, and the admin is lighter. You can join if your VAT-taxable turnover is £150,000 or less, and you must leave once it goes over £230,000.
The trap most people miss: if you spend very little on goods, HMRC classes you as a “limited cost trader” and puts you on a 16.5% flat rate, which almost always wipes out the saving. A consultant with barely any physical costs is the classic example: they join expecting simplicity and a small gain, and end up paying more than they would on Standard. Always run the numbers first.
Cash Accounting scheme: kinder to your cash flow
On the Standard scheme you owe HMRC the VAT on an invoice when you raise it, even if the customer hasn’t paid. Cash Accounting flips that: you only pay VAT once your customer has actually paid you, and you only reclaim once you’ve paid your suppliers. It’s a real help for businesses with slow payers, like a construction firm waiting 60 days on invoices. Available up to £1.35 million turnover.
Annual Accounting scheme: fewer, steadier payments
You file one VAT return a year and pay in instalments through the year. It smooths your payments and cuts the number of deadlines, which suits businesses that value predictability over reclaiming quickly. Also available up to £1.35 million.
Can you combine schemes?
Some, yes: Cash Accounting and Annual Accounting can work together. But the Flat Rate scheme uses its own rules and can’t be combined with Cash Accounting. Picking the right single scheme matters more than stacking them.
Not sure which scheme leaves you better off? Take our 2-minute quiz, or check the registration threshold first if you’re not yet registered.
Frequently asked questions
Common questions about VAT schemes.
What’s the difference between Flat Rate and Standard VAT?+
On Standard you reclaim VAT on your costs and pay the difference. On Flat Rate you pay a fixed percentage of turnover and mostly don’t reclaim. Flat Rate is simpler but can cost more if you have lots of VAT-able costs, or if you’re a “limited cost trader”.
Who should use Cash Accounting?+
Businesses that get paid slowly. You only pay VAT once your customer has paid you, which protects your cash flow. It’s available up to £1.35 million turnover.
What is a “limited cost trader”?+
A Flat Rate business that spends very little on goods. HMRC puts them on a 16.5% flat rate, which usually removes the benefit of the scheme. Service businesses need to check this before joining.
Can I change VAT scheme later?+
Yes, subject to the rules and timing for each scheme. If your circumstances change, we review whether a different scheme would leave you better off.
Explore more
Ready to get started?
Get a transparent fixed-fee quote in two minutes, or book a free consultation with a real expert.