Flat Rate VAT calculator

The Flat Rate Scheme (FRS) is an HMRC simplification that lets small businesses pay a single flat-rate percentage of their gross turnover (including VAT) to HMRC, rather than separately tracking and reclaiming VAT on inputs and outputs. The flat rate is sector-specific, ranging from around 4% to 14.5%, with most professional services on 14.5%. A separate 16.5% Limited Cost Trader rate applies to businesses that spend very little on goods. Small businesses with turnover up to £150,000 (excluding VAT) can join, and once joined can stay until turnover exceeds £230,000. This calculator compares Flat Rate to standard VAT to show whether the scheme saves money for your specific business.

How the Flat Rate Scheme works

Under the standard VAT scheme:

VAT to pay = VAT charged on sales − VAT reclaimed on purchases

Under the Flat Rate Scheme:

VAT to pay = Gross turnover Ã, Flat rate percentage

You still charge customers VAT at 20% on your invoices. But instead of paying HMRC the difference between output VAT (charged) and input VAT (reclaimed), you pay HMRC a flat percentage of your gross turnover (the VAT-inclusive total).

The arithmetic works because the flat rate is set lower than 20% (the implied output VAT in your gross turnover) to account for the input VAT you would have reclaimed under the standard scheme.

Flat rate percentages by sector

HMRC publishes a list of sector-specific rates. Selected examples for 2026:

A new business gets a 1% discount on their flat rate percentage in the first year of VAT registration. So an IT consultant on the 14.5% rate pays 13.5% in their first year.

The Limited Cost Trader rate

A separate 16.5% rate applies to “limited cost traders” — businesses whose spending on relevant goods is very low. The test:

• Goods cost less than 2% of VAT-inclusive turnover, OR
• Goods cost less than £1,000 a year (whichever is greater)

“Goods” means physical items used in the business — stationery, materials, stock — but not services, capital items (over £2,000), food and drink, or fuel for cars. The rule was introduced in 2017 to stop service businesses with minimal goods spend benefiting from the scheme.

For most modern service businesses (consultants, designers, software developers, accountants, professional services) the 16.5% rate is the realistic option, not the headline sector rate. At 16.5% the FRS is rarely better than the standard scheme.

Worked example: when FRS saves money

An IT consultant invoices £80,000 net (£96,000 gross including 20% VAT) in 2026/27. She has minimal expenses — £500/year of software subscriptions and £200/year of stationery.

Standard scheme:

• VAT charged on sales: £16,000
• VAT reclaimed on purchases: £100 (software £500 Ã, 20%)
• Note: the stationery is a “goods” expense which she could reclaim, but most of her cost is the IT services she sells.
• Net VAT to HMRC: £15,900

Flat Rate Scheme at 14.5% (first year, 13.5%):

• Annual gross turnover including VAT: £96,000
• Flat rate VAT: £96,000 Ã, 14.5% = £13,920 (or 13.5% in year 1 = £12,960)
• Net VAT to HMRC: £13,920

FRS saving over standard: £15,900 − £13,920 = £1,980 (£2,940 in year 1).

She’d qualify as a non-Limited Cost Trader because her annual goods spend (£200 stationery) is more than 2% of £96,000? No, 2% of £96,000 is £1,920, so she’s a Limited Cost Trader. She’d be on 16.5% not 14.5%:

FRS at 16.5%:

• Flat rate VAT: £96,000 Ã, 16.5% = £15,840
• Net VAT to HMRC: £15,840

FRS Limited Cost Trader vs standard scheme: £15,900 − £15,840 = £60 saving. Hardly worth the operational simplification.

When to leave the scheme

You must leave the FRS if:

• Your VAT-inclusive turnover exceeds £230,000 in the most recent year.
• You expect turnover to exceed £230,000 in the next 30 days.
• You buy a “capital item” worth £2,000 or more (you can’t reclaim the VAT, so the standard scheme would have been better — but this isn’t a hard mandatory leave, just a planning prompt).

You can also voluntarily leave at any time if the standard scheme would be more beneficial. Once you leave, you can’t rejoin for 12 months.

When to choose Flat Rate

The FRS makes sense when:

• You’re not a Limited Cost Trader (you have meaningful goods spend in your sector — typical of catering, retail, construction with materials).
• Your sector flat rate is well below 20% net of typical input VAT.
• You value the simplicity of one calculation over four-quarter input/output reconciliation.
• You’re in your first year (1% discount makes the FRS more attractive).

The FRS makes less sense when:

• You’re a Limited Cost Trader on 16.5% (no real saving).
• You have lots of zero-rated or VAT-exempt sales (FRS pays a flat percentage of all turnover including non-VAT income — sometimes more than under the standard scheme).
• You’re growing fast and will exit the scheme soon anyway.

Key takeaways

• Flat Rate VAT applies a single sector-specific percentage to gross turnover, replacing the input/output reconciliation of the standard scheme.
• Most professional services are on 14.5%, but the Limited Cost Trader rule pushes most modern service businesses to 16.5%.
• New VAT registrants get a 1% discount on their flat rate percentage in their first year.
• Eligibility: join below £150,000 turnover; leave when above £230,000.
• The scheme is a clear win for cash-rich-low-input sectors (catering, retail, hospitality), marginal at best for service businesses.

Frequently asked questions

Can I still reclaim VAT on capital items under FRS? Yes, on capital items costing £2,000 or more (including VAT). Below £2,000, capital items are absorbed in the flat rate just like any other input. Above £2,000, you reclaim VAT on the capital item separately on your VAT return.

Do I still issue normal VAT invoices to customers under FRS? Yes. From the customer’s perspective, an FRS invoice looks identical to a standard-scheme invoice — full 20% VAT charged. The scheme only changes how you account for VAT to HMRC, not what you charge customers.

What’s the catch if my flat rate is much less than 20%? The scheme is fair on average — sectors with high input VAT spend (retail, catering, construction) have lower flat rates because they would otherwise reclaim more under the standard scheme. The “saving” relative to the standard scheme exists where your actual input VAT spend is lower than HMRC’s sector average.

Can I leave the Flat Rate Scheme any time? Yes, voluntarily, at the end of any VAT period. You must leave if turnover exceeds £230,000. You cannot rejoin within 12 months of leaving.