The VAT Flat Rate Scheme under Making Tax Digital for VAT

acrenvo.com/guides/mtd-vat-flat-rate-scheme, last reviewed 1 November 2026

Joel is fictional. He is a freelance photographer who has just registered for VAT, and his accountant has suggested the Flat Rate Scheme because his business has few purchases. Joel also lets out a flat he used to live in, and he has started to wonder how the scheme sits with Making Tax Digital (MTD) for VAT: whether he still needs software, and which records it has to hold. This guide sets out what GOV.UK says about the scheme and what MTD for VAT asks of someone on it.

How the scheme works

Normally the VAT you pay HMRC is the difference between the VAT you charge and the VAT you pay on your own purchases. The Flat Rate Scheme works differently. With the Flat Rate Scheme:

• you pay a fixed rate of VAT to HMRC
• you keep the difference between what you charge your customers and pay to HMRC
• you cannot reclaim the VAT on your purchases - except for certain capital assets over £2,000

You calculate the tax you pay by multiplying your VAT flat rate by your ‘VAT inclusive turnover’. VAT inclusive turnover is different from standard VAT turnover. As well as business income (such as from sales), it includes the VAT paid on that income.

Who can join

The scheme is meant for smaller businesses. GOV.UK says you can join if you expect your VAT taxable turnover to be £150,000 or less (excluding VAT) in the next 12 months. To join the scheme you must apply to HMRC. There are also some exceptions. You cannot join the scheme if:

• you left the scheme in the last 12 months
• you committed a VAT offence in the last 12 months, for example VAT evasion
• you joined (or were eligible to join) a VAT group in the last 24 months
• you registered for VAT as a business division in the last 24 months
• your business is closely associated with another business
• you’ve joined a margin or capital goods VAT scheme

You cannot use the scheme with the Cash Accounting Scheme. Instead, the Flat Rate Scheme has its own cash-based method for calculating turnover.

Which flat rate applies

The rate depends on the kind of work you do. The VAT flat rate you use usually depends on your business type. You may pay a different rate if you only spend a small amount on goods. You get a 1% discount if you’re in your first year as a VAT-registered business.

A business that spends very little on goods pays a higher rate. You’re classed as a ‘limited cost business’ if your goods cost less than either:

• 2% of your turnover
• £1,000 a year (if your costs are more than 2%)

This means you pay a higher rate of 16.5%.

GOV.UK’s table lists a rate for each type of business. These are a few of the rows closest to property and small service businesses, in GOV.UK’s own words:

That gap matters to Joel, because his photography has a rate in the table but his flat does not, so he plans to ask his accountant how the rent is treated before he chooses. Talk to an accountant or tax adviser if you want advice on whether the Flat Rate Scheme is right for you.

What MTD for VAT asks of you on the scheme

Being on the Flat Rate Scheme does not take you out of MTD for VAT. Making Tax Digital for VAT requires all VAT-registered businesses to keep records digitally and file their VAT Returns using software. What changes is the list of records. VAT Notice 700/22 sets this out in a paragraph that, in its own words, has the force of law. If you account for VAT using the Flat Rate Scheme, you do not need to keep a digital record of:

• your purchases unless they’re capital expenditure goods on which input tax can be claimed
• the relevant goods used to determine if you need to apply the limited cost business rate

Your sales, and the other records the notice lists, still go into the software. The guide to keeping records for MTD for VAT and MTD for Income Tax covers that list.

Not every product has a setting for the scheme, and the notice allows for that. If your software does not include a Flat Rate Scheme setting, and does not allow you to include a rate of VAT other than standard, reduced, zero or exempt, then you’ll need to record the supply as either one standard-rated supply and one zero-rated supply. Alternatively, you can record the sale at one rate and correct the VAT through an adjustment at the end of the period. It is worth asking a software provider whether its product handles the Flat Rate Scheme before you rely on either route. The guide to MTD for VAT and MTD for Income Tax explains what the software has to be able to do.

Joining the scheme

How you join depends on whether you are registered yet. If you are not, you should register for VAT and join the Flat Rate Scheme at the same time. If you already are, apply to join the Flat Rate Scheme online or by post.

Leaving the scheme

You can choose to leave the scheme at any time. Leaving can also be required. You must leave the scheme if:

• on the anniversary of joining, your turnover in the last 12 months was more than £230,000 (including VAT) - or you expect it to be in the next 12 months
• you expect your total income in the next 30 days alone to be more than £230,000 (including VAT)

After you leave, you must wait 12 months before you can rejoin the scheme. To leave the scheme, contact HMRC with the following information:

• your name
• your signature
• your VAT number
• your business name and address

HMRC will then confirm your leaving date. Whether you are on the scheme or not, each return still has its own deadline, and the guide to VAT Return deadlines explains how GOV.UK works it out.

Questions about the Flat Rate Scheme and MTD for VAT