VAT Flat Rate Scheme Calculator
Choose your sector, enter your VAT-inclusive turnover — see the flat-rate VAT you'd pay, the first-year discount, and how it compares with standard VAT accounting.
How it works
Under the Flat Rate Scheme you charge customers 20% VAT as normal but pay HMRC a fixed percentage of your VAT-INCLUSIVE turnover, set by sector — from 4% (food retail) to 14.5% (IT consultancy, accountancy, legal) — and in exchange you give up reclaiming input VAT on most purchases. Joining requires expected VAT-taxable turnover of £150,000 or less (ex VAT).
Two big modifiers: in your FIRST YEAR of VAT registration you get a 1% discount on your sector rate; and if you're a "limited cost business" — goods cost under 2% of turnover or under £1,000/year — you must use 16.5% regardless of sector, which usually wipes out the scheme's benefit for service contractors.
HONEST NOTE: the comparison shown against standard VAT is the OUTPUT side only — under standard accounting you'd also reclaim input VAT on purchases, which this calculator can't know. FRS wins for service businesses with low VATable costs and a low sector rate; it loses if you buy significant goods/services with VAT on them. Since the 2017 limited-cost rule, far fewer businesses benefit than the old folklore suggests.
FAQ
How does the VAT Flat Rate Scheme work?
You invoice clients with 20% VAT as usual, but instead of the normal output-minus-input calculation, you simply pay HMRC your sector's flat percentage of gross (VAT-inclusive) turnover. Example: an IT consultant billing £60,000 including VAT at the 14.5% rate pays £8,700 — versus £10,000 output VAT under standard accounting, before any input reclaims. The difference is your margin for giving up input VAT recovery on day-to-day costs.
What is a limited cost business and why is the rate 16.5%?
A business whose spending on GOODS (not services, not capital items, not food/vehicles/fuel for most) is less than 2% of VAT-inclusive turnover, or less than £1,000 a year. Most contractors and consultants fall into this test — and must then use 16.5% instead of their sector rate. At 16.5% of gross turnover you pay almost exactly the 20/120 output VAT, so the scheme saves nearly nothing; HMRC introduced the rule in 2017 precisely to close the contractor advantage.
Should I join the Flat Rate Scheme or stay on standard VAT?
Join if: your sector rate is low, your VATable purchases are small (but you still buy enough goods to escape the limited-cost test), and you value simpler bookkeeping. Stay standard if: you reclaim significant input VAT (equipment, stock, subcontractors), your clients are VAT-registered anyway, or you'd be stuck at 16.5%. Run both numbers with a full year's figures before deciding — and note you must leave the scheme once VAT-inclusive income exceeds the exit threshold (see HMRC VAT Notice 733).