What is the VAT Flat Rate Scheme?

The VAT Flat Rate Scheme (FRS) lets small businesses pay a fixed percentage of their VAT-inclusive turnover to HMRC rather than calculating VAT on individual sales and purchases. You keep the difference between the standard rate VAT you charge clients and the flat rate you pay HMRC.

Who is eligible for the Flat Rate Scheme?

UK VAT-registered businesses with expected VAT-exclusive turnover of £150,000 or less in the next 12 months. You cannot join if your VAT-exclusive turnover exceeded £230,000 in the last 12 months.

What is the 1% first-year discount?

In your first year of VAT registration, you can deduct 1 percentage point from your flat rate percentage. So a 14.5% rate becomes 13.5% in year one. This can make the scheme significantly more profitable in the first year.

What is the 16.5% limited cost trader rate?

If your VAT-inclusive expenditure on goods is less than either 2% of your VAT-inclusive turnover or £1,000 per year, you are classified as a 'limited cost trader' and must use a 16.5% flat rate, regardless of your sector. Most IT contractors and consultants fall into this category.

When does the Flat Rate Scheme stop being profitable?

The FRS works when your actual VAT input tax (on purchases) is less than the difference you keep under FRS. If you have significant VAT-able expenses (equipment, software subscriptions with VAT), the standard method may reclaim more. Most solo directors with low expenses benefit from FRS.

2026-27 · VAT Calculator

VAT Flat Rate Scheme Calculator

Is the VAT Flat Rate Scheme profitable for your company? Enter your sector and turnover to find out how much you keep — or lose — versus standard VAT accounting.

The VAT Flat Rate Scheme (FRS) is a HMRC-approved simplification for small VAT-registered businesses. Instead of tracking VAT on every individual sale and purchase, you pay a single fixed percentage of your VAT-inclusive turnover directly to HMRC. The key benefit: you charge clients the standard 20% VAT rate, but remit only the flat rate percentage — and the difference stays in your company.

For a typical IT contractor or consultant billing £80,000 per year, this can mean keeping £2,000–£4,000 annually that would otherwise go to HMRC under the standard VAT method. The flat rate percentage varies by sector: computer and IT consultancy is 14.5%, financial services 13.5%, general business services 12%.

There is an important exception: the Limited Cost Trader rule. If your VAT-able expenditure on goods is below 2% of VAT-inclusive turnover (or less than £1,000 per year), HMRC requires you to use a flat rate of 16.5% regardless of sector. Most solo directors with minimal physical purchases — particularly those in IT, consulting, and professional services — fall into this category. At 16.5%, the FRS is typically no longer beneficial.

First-year registrants benefit from a 1% discount — your flat rate is reduced by one percentage point in the first year of VAT registration, which makes the scheme significantly more profitable during that period.

Use this calculator to find your sector rate, check whether you qualify as a limited cost trader, and see whether the scheme saves you money on your current turnover.

Your details

Annual VAT-exclusive turnover (£)

Your revenue before adding VAT — what you invoice your clients net of VAT

Business sector

First year of VAT registration (−1% discount)Limited cost trader (goods spend <2% turnover â†’ 16.5% applies)

Annual FRS profit

£2,080

Flat rate applied

14.5%

Breakdown

VAT-exclusive turnover£80,000

VAT-inclusive turnover (×1.20)£96,000

VAT collected from clients (20%)£16,000

VAT paid to HMRC (14.5% of incl. turnover)£13,920

Annual surplus kept£2,080

Per quarter£520

How it works

1
Charge clients standard VAT (20%)
You invoice clients at 20% VAT on top of your fee. This is collected and held in your company account until you pay HMRC.
2
Pay HMRC your flat rate percentage
Instead of paying all 20%, you pay your sector flat rate on your VAT-inclusive turnover. The difference is yours to keep.
3
The surplus is taxable income
The FRS profit is subject to corporation tax — but it still represents a net benefit versus standard accounting for most low-expense businesses.
4
Watch the limited cost trader rule
If your goods purchases are under 2% of turnover, HMRC applies a flat rate of 16.5%, which often makes FRS uneconomic for pure service companies.

HMRC sources

VAT Flat Rate Scheme (gov.uk)VAT Flat Rate Scheme percentages by sector Limited cost trader rules (HMRC)

Disclaimer: For illustrative purposes only. VAT treatment depends on your specific business activities. Confirm your sector rate and limited cost trader status with a qualified VAT adviser or HMRC before registering.

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