VAT tool · Flat Rate Scheme
Flat Rate VAT Calculator: Flat Rate Scheme or Standard VAT, Which Saves More?
On the Flat Rate Scheme you pay HMRC a fixed percentage of your VAT inclusive income instead of working out the VAT on every sale and purchase. Whether that saves you money depends on three things: your trade’s percentage, how much you spend on goods, and whether you are in your first year of registration. Enter your figures below to compare the two methods side by side.
Flat Rate Scheme calculator
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Pick the activity that brings in most of your turnover. HMRC does not let you split between sectors.
Your yearly income, before VAT
For example rent from a flat you let
Your yearly costs, including VAT
Leave out single capital purchases of £2,000 or more. You can reclaim VAT on those either way.
Physical goods used only for the business. Not fuel, food for you or staff, or services.
The Flat Rate Scheme costs you about £380.00 more a year
- Your VAT inclusive turnover for the scheme is £72,000.00, and you would charge customers £12,000.00 in VAT.
- You count as a limited cost business. Your goods (£300.00) are under 2% of turnover (£1,440.00), so the 16.5% rate replaces your sector’s 14.5%.
How the comparison works
The calculator runs your figures through both methods for a full year.
Standard accounting: VAT on your sales minus VAT on your purchases
Flat Rate Scheme: VAT inclusive turnover × your flat rate %
Two details make a big difference, and both trip people up:
- The flat rate is applied to your turnover including VAT. If you invoice £1,000 plus £200 VAT, the percentage is worked out on £1,200, not £1,000.
- Flat rate turnover includes zero rated and exempt income. Rent from a flat you let, or zero rated food sales, go into the sum even though no VAT was charged on them.
Your customers see no difference. You still charge VAT at the normal rate on your invoices, 20%, 5% or 0%. The flat rate only changes what you pay over to HMRC. If you need to build an invoice with more than one rate on it, our guide to valid VAT invoices shows what it must include, and our VAT calculator works out the VAT on each line.
The 16.5% limited cost business rate
Since April 2017, businesses that spend very little on goods pay a flat rate of 16.5% whatever their sector. HMRC calls them limited cost businesses. You fall into this group if your spending on goods, including VAT, is either:
- less than 2% of your VAT inclusive turnover, or
- more than 2% of turnover but less than £1,000 a year (£250 a quarter).
Only certain goods count. They must be used only for your business, and HMRC leaves out capital items of any value, food and drink for you or your staff, vehicles, fuel and parts unless you work in transport using your own or a leased vehicle, and goods you give away, such as promotional items, gifts or donations. Goods you buy to resell or hire out only count if selling or hiring goods is your main business. Services, such as software subscriptions, phone contracts, accountancy fees and rent, never count.
16.5% of your VAT inclusive turnover works out at 19.8% of your turnover before VAT. That is almost all of the 20% you charge, so a limited cost business on the scheme keeps next to nothing and loses the right to reclaim VAT on costs. For most consultants and contractors in this position, the scheme is no longer worth it.
The 16.5% rate as a share of your turnover before VAT, when all your sales are at 20%
The test is applied for each VAT return period, so a quarter with low spending on goods can put you on 16.5% for that quarter even if the rest of the year is fine. The calculator uses a whole year as a guide.
Three worked examples
Press the example buttons in the calculator to load these.
| IT contractor | Hair salon | Food shop | |
|---|---|---|---|
| Sales before VAT | £60,000 at 20% | £70,000 at 20% | £80,000 at 0%, £5,000 at 20% |
| Flat rate turnover | £72,000 | £84,000 | £86,000 |
| Purchases with VAT | £3,000 | £9,000 | £12,000 |
| Of which goods | £300 | £6,000 | £9,000 |
| Rate used | 16.5% (limited cost) | 13% | 4% |
| Flat Rate Scheme VAT | £11,880 | £10,920 | £3,440 |
| Standard accounting VAT | £11,500 | £12,500 | £1,000 refund |
| Result | Scheme costs £380 more | Scheme saves £1,580 | Scheme costs £4,440 more |
The IT contractor buys almost no goods, so the 16.5% rate applies. In their first year, with the 1% discount, the scheme would just about pay (£11,160 against £11,500). From year two it costs more.
The hair salon buys plenty of products, so it keeps the 13% hairdressing rate and saves £1,580 a year, as well as the time spent tracking VAT on every purchase.
The food shop shows the biggest trap. Most of its sales are zero rated, so under standard accounting it would get money back from HMRC. On the scheme, 4% is charged on all of its turnover, including the zero rated food. Businesses that mainly sell zero rated goods should almost always stay on standard accounting.
Who can use the scheme
| Rule | Detail |
|---|---|
| Joining | You expect VAT taxable turnover of £150,000 or less, excluding VAT, in the next 12 months |
| Leaving | You must leave if total income including VAT was over £230,000 in the year ending on your anniversary of joining, or you expect more than £230,000 in the next 30 days alone |
| Cannot join | You left the scheme in the last 12 months, had a VAT offence, a penalty for dishonest conduct or a compound penalty in the last 12 months, are closely associated with another business, joined or were eligible to join a VAT group in the last 24 months, registered for VAT as a business division in the last 24 months, or use a margin scheme, such as the one for second hand goods, or the Capital Goods Scheme |
| First year discount | 1% off your rate until the day before the first anniversary of your VAT registration |
| Capital purchases | You can reclaim VAT on a single purchase of capital goods costing £2,000 or more including VAT |
| Mixed activities | Use the rate for the activity that brings in the most turnover |
You can join from the start of your registration or later, and you can combine it with a cash based way of working out turnover. If cash flow matters more than the saving, compare it with the Cash Accounting Scheme. Our guide to the Flat Rate Scheme explains how to apply and how to leave.
Every flat rate percentage
These are HMRC’s current rates, unchanged since the temporary hospitality reductions ended on 31 March 2022.
| Type of business | Flat rate |
|---|---|
| Accountancy or bookkeeping | 14.5% |
| Advertising | 11% |
| Agricultural services | 11% |
| Any other activity not listed elsewhere | 12% |
| Architect, civil and structural engineer or surveyor | 14.5% |
| Boarding or care of animals | 12% |
| Business services not listed elsewhere | 12% |
| Catering services, including restaurants and takeaways | 12.5% |
| Computer and IT consultancy or data processing | 14.5% |
| Computer repair services | 10.5% |
| Entertainment or journalism | 12.5% |
| Estate agency or property management services | 12% |
| Farming or agriculture not listed elsewhere | 6.5% |
| Film, radio, television or video production | 13% |
| Financial services | 13.5% |
| Forestry or fishing | 10.5% |
| General building or construction services | 9.5% |
| Hairdressing or other beauty treatment services | 13% |
| Hiring or renting goods | 9.5% |
| Hotel or accommodation | 10.5% |
| Investigation or security | 12% |
| Labour only building or construction services | 14.5% |
| Laundry or dry cleaning services | 12% |
| Lawyer or legal services | 14.5% |
| Library, archive, museum or other cultural activity | 9.5% |
| Management consultancy | 14% |
| Manufacturing fabricated metal products | 10.5% |
| Manufacturing food | 9% |
| Manufacturing not listed elsewhere | 9.5% |
| Manufacturing yarn, textiles or clothing | 9% |
| Membership organisation | 8% |
| Mining or quarrying | 10% |
| Packaging | 9% |
| Photography | 11% |
| Post offices | 5% |
| Printing | 8.5% |
| Publishing | 11% |
| Pubs | 6.5% |
| Real estate activity not listed elsewhere | 14% |
| Repairing personal or household goods | 10% |
| Repairing vehicles | 8.5% |
| Retailing food, confectionery, tobacco, newspapers or children’s clothing | 4% |
| Retailing pharmaceuticals, medical goods, cosmetics or toiletries | 8% |
| Retailing not listed elsewhere | 7.5% |
| Retailing vehicles or fuel | 6.5% |
| Secretarial services | 13% |
| Social work | 11% |
| Sport or recreation | 8.5% |
| Transport or storage, including couriers, freight, removals and taxis | 10% |
| Travel agency | 10.5% |
| Veterinary medicine | 11% |
| Wholesaling agricultural products | 8% |
| Wholesaling food | 7.5% |
| Wholesaling not listed elsewhere | 8.5% |
| Limited cost business, any sector | 16.5% |
| No trade matches that search. Try a shorter word. | |
Labour only building or construction services means the materials you supply are worth less than 10% of your turnover from that work. Other building work uses the 9.5% general building rate.
Between 15 July 2020 and 31 March 2022 the rates for catering, hotels and accommodation, and pubs were temporarily lower, to match the hospitality VAT cut at the time. If there is a new hospitality VAT cut at the Autumn Budget on 28 October, expect these three rates to change again, and we will update this page.
Frequently asked questions
Do I charge customers the flat rate?
No. Your invoices show VAT at the normal rate for what you sell. The flat rate is only used to work out what you pay HMRC.
Can I reclaim VAT on purchases on the Flat Rate Scheme?
Only on a single capital purchase of £2,000 or more including VAT, such as a van or machinery. Everything else is covered by the flat rate.
What counts as goods for the 16.5% test?
Physical items used only for the business, such as stock you sell as your main trade, materials, or products used in your service. Services, rent, fuel, vehicles, food and drink for staff, gifts and promotional items, and capital items do not count.
Can I buy goods to avoid the 16.5% rate?
Buying things you do not need just to pass the test is not what the rules intend, and HMRC can challenge purchases that are not genuinely for the business. HMRC says goods bought only to meet the test, such as stock you pile up or throw away, do not count at all.
Which rate do I use if I do two kinds of work?
The rate for the activity that brings in the larger part of your turnover. You cannot split turnover between two rates.
How much turnover can I have on the scheme?
You can join with expected taxable turnover up to £150,000 before VAT, and you must leave once total income including VAT goes over £230,000.
Does the first year discount apply if I join later?
The discount runs from your VAT registration date, not your joining date. If you join six months after registering, you get the discount for the remaining six months only.
Not registered yet? Check where you stand with the VAT threshold tracker or read our VAT registration threshold guide. Freelancers weighing up voluntary registration will find more in VAT for sole traders and freelancers.
This is general information, not tax advice. Check GOV.UK or speak to an accountant about your own position.