Flat Rate VAT Calculator UK 2025

What Is the UK VAT Flat Rate Scheme?

The VAT Flat Rate Scheme (FRS) is a simplified method of accounting for VAT that is designed to reduce the administrative burden for small businesses. Rather than recording VAT on every single sale and purchase separately, businesses using the scheme pay HMRC a fixed percentage of their gross (VAT-inclusive) turnover. The flat rate percentage varies by business sector and is set by HMRC to reflect the typical VAT cost structure of each industry.

Introduced in 2002, the scheme is particularly popular with sole traders, freelancers, and small limited companies who have relatively few VAT-able purchases. The key financial benefit is that businesses charge customers the standard 20% VAT rate but pay HMRC a lower flat rate — the difference is kept as additional profit.

How the Flat Rate Scheme Works Step by Step

Understanding the mechanics of the Flat Rate Scheme is essential before deciding whether it is right for your business. Here is a detailed walkthrough:

1. Register for VAT — You must first be registered for VAT. You can apply to join the FRS when you register, or at any point thereafter while your taxable turnover is below £150,000 (ex-VAT).
2. Charge customers 20% VAT — Your invoices still show the standard 20% VAT rate. Your customers see no difference.
3. Calculate gross turnover — Add all your gross (VAT-inclusive) receipts together for the VAT period (typically quarterly).
4. Apply your flat rate — Multiply your gross turnover by your flat rate percentage. This is what you pay HMRC.
5. Keep the difference — The VAT you collected from clients minus what you pay HMRC is yours to keep as additional income.

2025/26 Flat Rate Percentages by Sector

The following table shows the HMRC flat rates applicable for the 2025/26 tax year. Note these are applied to your gross (VAT-inclusive) turnover:

Eligibility: Who Can Join the Flat Rate Scheme?

The Flat Rate Scheme is open to VAT-registered businesses with an expected VAT-taxable turnover of £150,000 or less (excluding VAT) in the next 12 months. Once registered on the scheme, you must leave if:

• Your total business income (VAT-inclusive) in the previous 12 months exceeded £230,000, or
• You expect your VAT-inclusive turnover to exceed £230,000 in the next 30 days alone.

HMRC guidance also excludes businesses that have been convicted of VAT-related fraud within the past year, or those who left the scheme voluntarily within the previous 12 months.

The Limited Cost Trader Rule Explained

Since 1 April 2017, a special rate of 16.5% applies to businesses classified as "limited cost traders." You are a limited cost trader if your spending on goods (not services) is either:

• Less than 2% of your VAT-inclusive turnover, or
• Less than £1,000 per year (even if this is more than 2% of turnover).

This rule significantly affects service businesses — consultants, IT contractors, and many freelancers. At 16.5%, the FRS advantage over standard VAT is much reduced. For example, at 16.5% on a £120,000 gross turnover, you pay HMRC £19,800 out of £20,000 VAT collected — a saving of only £200. Many limited cost traders find standard VAT accounting more beneficial.

Flat Rate Scheme vs Standard VAT: A Worked Example

Consider a UK IT consultant with a net turnover of £80,000 per year and minimal business purchases:

First-Year 1% Discount for New Businesses

Businesses in their first year of VAT registration receive a 1% discount on their flat rate percentage during that first year. For example, an IT consultant would pay 13.5% rather than 14.5% in their first year of VAT registration. This discount applies from the date of VAT registration, not from the date of joining the FRS. It automatically ceases on the anniversary of your VAT registration.

Capital Expenditure VAT Claims Under the FRS

One important exception to the "no input VAT claims" rule is capital expenditure. If you purchase a single capital asset with a VAT-inclusive cost of £2,000 or more, you can reclaim the VAT on that item separately, outside the flat rate calculation. This means if you invest in expensive equipment — a new computer workstation costing £3,600 including £600 VAT — you can reclaim that £600 on your next VAT return. This is particularly valuable for businesses making one-off significant capital investments.

Practical Tips for Flat Rate Scheme Users

• Review your sector annually — If your business activities change, your flat rate sector may change too. Always apply the correct rate for your predominant business activity.
• Check limited cost trader status — Review quarterly whether you qualify as a limited cost trader, as this can change based on your spending patterns.
• Keep VAT invoices — Even though you cannot normally reclaim input VAT, you must still keep proper records and issue correct VAT invoices to customers.
• Monitor your turnover threshold — Keep a running 12-month total to ensure you do not inadvertently exceed the £230,000 exit threshold.
• Compare annually — Run the numbers each year to confirm the FRS is still more beneficial than standard VAT, especially if your business cost structure changes.

How to Apply for the VAT Flat Rate Scheme

You can apply to join the Flat Rate Scheme online via HMRC's official VAT Flat Rate Scheme guidance. Applications are made through your VAT online account (Government Gateway). HMRC will confirm your acceptance and tell you the date from which you can start using the scheme. You can also apply by completing form VAT600 FRS and posting it to HMRC.

Frequently Asked Questions: Flat Rate VAT