VAT Flat Rate Scheme Calculator

The VAT Flat Rate Scheme simplifies VAT accounting for small businesses with VAT-taxable turnover of £150,000 or less, excluding VAT. Instead of tracking VAT on every purchase and sale, you charge customers the standard 20% VAT but pay HMRC a fixed percentage of your gross, VAT-inclusive turnover, and you keep the difference. The percentage depends on your trade, for example 14.5% for computer and IT consultancy, 12% for management consultancy and 10% for real estate. Other published rates include 14.5% for accountancy and legal services, 11% for advertising, 13% for hairdressing and beauty, 12.5% for catering, 10% for transport, 8.5% for printing and 4% for food retailing.

The arithmetic is easy to picture. On £100,000 of net sales you invoice £20,000 of VAT and collect £120,000 gross. At a flat rate of 13% you hand HMRC £15,600 rather than the £20,000 you charged, less whatever input VAT you could have reclaimed under standard accounting. That gap is the whole point of the scheme, which is why it suits consultants and other service businesses whose purchases carry little VAT, and works badly for retailers and manufacturers buying stock and materials with VAT on top.

The limited cost trader rule is what caught most of those service businesses out. If your purchases of goods, ignoring capital expenditure over £2,000, come to less than 2% of turnover, or to under £1,000 a year, you pay 16.5% whatever your sector. Goods means physical items, so software, training, travel and professional services do not count towards the test, and most consultants, accountants and IT contractors fail it. Since the rule arrived in 2017 the scheme has lost much of its appeal for pure-services firms, and plenty of former 14.5% users are now better off on standard VAT.

A 1% discount applies for the first 12 months of VAT registration, so an IT consultant on 14.5% pays 13.5% in the first year. You can apply for the scheme on the same form as your VAT registration, or move across from standard accounting at the start of a VAT period by writing to HMRC. Leaving is equally open, though you cannot rejoin for 12 months, and you must go once turnover including VAT passes £230,000. On the way out you account for VAT on closing stock at the standard 20%.

One exception lets you reclaim input VAT on a single capital purchase of more than £2,000 including VAT on one invoice. A £2,500 laptop carrying £500 of VAT is fully reclaimable even on the flat rate, and property, vehicles and machinery usually qualify. Anything below £2,000 per invoice does not, and you cannot add up smaller purchases to reach the threshold, which HMRC polices strictly. Where one invoice covers several separate items rather than a single asset, the position is less clear and worth checking before you claim.

Deciding whether to join means comparing three numbers, the VAT you collect at 20% on net sales, the input VAT you could reclaim under standard accounting, and the flat rate payment. Freelancers and knowledge-work businesses whose input VAT runs at 2-3% of turnover often still come out ahead. Tradespeople buying materials are marginal, and e-commerce sellers with input VAT of 5-15% of turnover almost never benefit. The scheme also saves the time spent recording VAT on individual purchases, which for some one-person businesses is worth more than the money.