The VAT Flat Rate Scheme lets small businesses pay HMRC a single fixed percentage of turnover instead of working out VAT on every sale and purchase. It is simpler than standard VAT accounting — but getting the calculation right matters, because using the wrong percentage, or missing the limited-cost trader rule, can leave you paying more VAT than you should.
This guide covers the calculation in plain English: what the scheme is, how it differs from standard VAT, the exact formula, worked £ examples, the current HMRC percentages for 2026, the 16.5% limited-cost trader rule, and how to check whether the scheme saves you money.
What Is the Flat Rate Scheme?
The Flat Rate Scheme is an optional VAT accounting scheme for small businesses. Instead of charging VAT on sales, reclaiming VAT on purchases, and paying HMRC the difference, you simply pay HMRC a fixed percentage of your VAT-inclusive turnover.
Key facts:
- You still charge customers the normal VAT rate — usually 20% — on your invoices.
- You pay HMRC a lower percentage of your gross turnover, and keep the difference.
- You cannot reclaim VAT on most purchases (exception: capital assets over £2,000 on a single invoice, including VAT).
- It suits businesses with VAT-taxable turnover of up to £150,000 a year.
How It Differs from Standard VAT Accounting
This is the point most people get wrong, so let's be precise.
Standard VAT accounting: you sell £1,000 + £200 VAT, reclaim £100 VAT on materials, and pay HMRC £200 − £100 = £100.
Flat Rate Scheme (photographer at 11%): you sell £1,000 + £200 VAT, then pay 11% × £1,200 = £132, keeping £68 of the VAT you collected.
That is the whole difference: the flat rate is applied to VAT-inclusive turnover — not net sales — and you give up input VAT recovery in exchange for the simpler calculation.
Who Can Join: Eligibility Rules
To join the Flat Rate Scheme, you must:
- Already be VAT registered. The scheme is not an alternative to registering. You must register for VAT first if your VAT-taxable turnover exceeds the £90,000 registration threshold (rolling 12-month, or expected in the next 30 days alone).
- Expect your VAT-taxable turnover to be £150,000 or less (excluding VAT) in the next 12 months.
- Not have left the Flat Rate Scheme in the previous 12 months.
- Not have committed a VAT offence (such as tax evasion) in the previous 24 months.
- Not be part of a VAT group, and not use other schemes such as Cash Accounting or the VAT margin schemes.
The Limited-Cost Trader Rule (16.5%)
Before you look up your sector's percentage, check this rule first — it overrides everything else.
You are classed as a limited-cost trader if, in a VAT return period, your spending on goods (not services) is less than 2% of your VAT-inclusive turnover, or less than £1,000 a year (£250 per quarter if you file quarterly) — even if your spending is above 2%.
If either test bites, you must use a flat rate of 16.5%, whatever your trade sector says. The test is run every VAT return period, not once.
What counts as "goods"? Only physical items you buy and use in the business. It excludes services, capital expenditure, food and drink for you or your staff, and vehicle costs including fuel (unless you run a transport business). That is why most freelancers, consultants, designers and IT contractors land on 16.5%: they buy software and subscriptions (services), not goods.
At 16.5% of gross, you are paying the equivalent of 19.8% of your net turnover (16.5% × 1.2) — almost the full 20% you charged — while giving up all input VAT recovery. For limited-cost traders, the standard scheme is very often cheaper.
Step-by-Step: How to Calculate Flat Rate VAT
Here is the calculation in five steps:
Step 1 — Invoice your customers and add VAT as normal. Add 20% VAT (or the correct reduced/zero rate if it applies) to your net prices, exactly as you would under standard accounting.
Step 2 — Find your flat rate. Check the limited-cost trader rule first (16.5% if it applies). If not, use the percentage HMRC publishes for your business type (see the table below).
Step 3 — Multiply the flat rate by your VAT-inclusive turnover. Take everything you invoiced in the quarter including the VAT on top, and multiply by your flat rate. That is your VAT bill:
VAT due = (net sales × 1.20) × flat rate %
Step 4 — Report and pay on your VAT return. File a normal quarterly VAT return; payment is due 1 calendar month and 7 days after the quarter ends.
Step 5 — Reclaim VAT only on large capital assets. The one exception to the no-reclaim rule: a single capital purchase over £2,000 including VAT.
Worked Example 1: IT Consultant on the 14.5% Sector Rate
Priya is a self-employed IT consultant who invoices £60,000 in a quarter. Her goods spending clears the limited-cost test, so her sector rate of 14.5% applies.
- Output VAT charged at 20%: £60,000 × 20% = £12,000
- VAT-inclusive turnover: £60,000 + £12,000 = £72,000
- Flat Rate VAT due: £72,000 × 14.5% = £10,440 — she keeps £1,560
If her input VAT was small — say £400 — standard accounting would cost £11,600, so the scheme saves her £1,160.
Worked Example 2: Limited-Cost Trader on 16.5%
Daniel is a freelance graphic designer who invoices £40,000 net in a quarter. He spends almost nothing on physical goods — software subscriptions and a co-working desk (all services) — so the limited-cost test bites and he must use 16.5%.
- Output VAT charged at 20%: £40,000 × 20% = £8,000
- VAT-inclusive turnover: £40,000 + £8,000 = £48,000
- Flat Rate VAT due at 16.5%: £48,000 × 16.5% = £7,920
- Difference he keeps: £8,000 − £7,920 = just £80
Under standard accounting, Daniel's input VAT might be around £500, so he would pay £8,000 − £500 = £7,500. The scheme costs him £420 more — the classic trap for service businesses.
Worked Example 3: The 1% First-Year Discount
In your first 12 months as a VAT-registered business (not your first year on the scheme), you get a 1 percentage point discount on your flat rate. It stacks with the limited-cost rate.
Take Priya from Example 1 in her first year of VAT registration:
- Discounted rate: 14.5% − 1% = 13.5% → pays £9,720, keeps £2,280
And Daniel from Example 2, also in year one:
- Discounted limited-cost rate: 16.5% − 1% = 15.5% → pays £7,440, keeps £560
The discount is modest, but on a full year's turnover it adds up — and in year one, even a limited-cost trader keeps £14 of VAT for every £1,000 of net sales.
2026 Flat-Rate Percentages by Sector
These are the current HMRC percentages (verified against GOV.UK). Use the rate that best matches your main business activity — and remember the 16.5% limited-cost rate overrides all of them.
| Business type | Flat rate |
|---|---|
| Accountancy or book-keeping | 14.5% |
| Computer and IT consultancy or data processing | 14.5% |
| Management consultancy | 14% |
| Hairdressing or other beauty treatment services | 13% |
| Catering services (restaurants, takeaways) | 12.5% |
| Photography | 11% |
| Hotel or accommodation | 10.5% |
| Retailing not listed elsewhere | 7.5% |
| Any other activity not listed elsewhere | 12% |
| Limited-cost trader (any sector) | 16.5% |
The 1% First-Year Discount
New VAT-registered businesses get 1% off their flat rate for the first 12 months of registration. Two details people often miss:
- The 12 months start when you become VAT registered, not when you join the scheme. Join two years after registering and there is no discount to claim.
- It stacks with the limited-cost rate (16.5% → 15.5%), so even low-cost service businesses get a small benefit in year one.
How to Apply
- Register for VAT first (required above £90,000 of taxable turnover).
- Apply online through HMRC — when registering for VAT, or afterwards via your VAT online account (form VAT600FRS).
- Confirm your flat rate for your business type, and re-check the limited-cost test every quarter.
You cannot use the Flat Rate Scheme together with Cash Accounting, the VAT margin schemes, or as part of a VAT group.
Flat Rate vs Standard Accounting: Pros and Cons
Pros of the Flat Rate Scheme:
- Simpler bookkeeping and predictable bills — one percentage of turnover replaces the output-minus-input calculation.
- Can pay less VAT overall — businesses with low input VAT and a favourable sector rate genuinely keep some of the VAT they charge.
Cons of the Flat Rate Scheme:
- No input VAT recovery on day-to-day purchases (only capital assets over £2,000 per single invoice).
- The 16.5% limited-cost rate usually wipes out the benefit for service businesses with low goods spending.
- You pay flat-rate VAT on zero-rated and exempt sales too — income on which you charged no VAT still counts in your VAT-inclusive turnover.
Rule of thumb: if your input VAT each quarter is more than roughly 20% of the VAT you charge, standard accounting almost always wins. If your input VAT is tiny and your sector rate is well below 16.5%, the Flat Rate Scheme is worth modelling.
When to Leave the Scheme
You can leave voluntarily at any time, but you must leave if your VAT-inclusive turnover was over £230,000 in the 12 months to your joining anniversary (or you expect it to be in the next 12 months), or you expect over £230,000 in the next 30 days alone.
HMRC may allow you to stay if it agrees your VAT-inclusive turnover for the next 12 months will be £191,500 or less. Note the trap: the joining test (£150,000) is measured excluding VAT, while both leaving tests (£230,000) are measured including VAT.
FAQs
How do you calculate Flat Rate VAT?
Multiply your VAT-inclusive turnover (net sales plus the VAT you charged) by your flat-rate percentage. Example: £60,000 + £12,000 VAT = £72,000; at 14.5% you pay £10,440. You still charge customers the normal 20% VAT.
What is the flat rate for a limited-cost trader?
16.5% of VAT-inclusive turnover (15.5% in your first year of VAT registration). You are one if you spend under 2% of turnover on goods, or under £1,000 a year on goods — services do not count.
Do I still charge 20% VAT on invoices?
Yes — invoices look exactly the same. You charge the normal VAT rate to customers; the flat rate only changes how much of it you hand over to HMRC.
Can I reclaim VAT on purchases?
No, not on day-to-day purchases — that is the trade-off. The only exception is capital assets over £2,000 including VAT on a single invoice.
When must I leave the scheme?
When VAT-inclusive turnover exceeds £230,000 — in the 12 months to your joining anniversary, or expected in the next 30 days alone. You can also leave voluntarily at any time.
Is it worth it for a sole trader?
It can be, especially in year one with the 1% discount. But most service sole traders are limited-cost traders on 16.5%, which usually costs more than standard VAT accounting. Compare both on your real figures before joining.
Figures based on HMRC guidance for 2026/27: £90,000 VAT registration threshold; 20%/5%/0% VAT rates; £150,000 (ex-VAT) joining limit; £230,000 (incl-VAT) exit threshold; 16.5% limited-cost trader rate.
Educational information and estimates. These tools do not submit VAT returns or determine the treatment of a specific transaction.