Tax Calculator

VAT Flat Rate Scheme Calculator 2025/26 — Is It Worth Joining?

The VAT Flat Rate Scheme lets eligible businesses pay a fixed percentage of gross turnover instead of accounting for every VAT transaction. It can save money — but not for every business, especially after the limited cost business rule.

Your Business

Flat rate % for your sector Check gov.uk/vat-flat-rate-scheme for your sector Annual VAT-exclusive turnover (£) Your sales before VAT Annual VATable purchases (£) Goods and services you buy for the business First year of VAT registration? Are you a limited cost business? Spend less than 2% of turnover on goods?

FRS vs Standard VAT

Annual FRS saving vs standard VAT

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VAT collected from customers

£0

Standard VAT to HMRC

£0

Flat rate VAT to HMRC

£0

Annual benefit / (cost)

£0

Join the FRS?

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What Is the VAT Flat Rate Scheme?

The VAT Flat Rate Scheme (FRS) is an HMRC simplification measure available to businesses with VAT-taxable turnover of £150,000 or less (excluding VAT). Instead of accounting for VAT on every individual sale and purchase, you pay HMRC a fixed percentage of your total gross (VAT-inclusive) turnover. The percentage depends on your trade sector — from around 4% for some retail businesses to 14.5% for accountants, lawyers, and IT consultants.

The attraction of the scheme is straightforward: the 20% VAT you charge your customers is more than the flat rate you pay to HMRC, and the difference is profit. For example, if your flat rate is 12% and you invoice £100,000 (plus £20,000 VAT = £120,000 gross), you pay HMRC 12% of £120,000 = £14,400, keeping £5,600 of the collected VAT. However, you cannot reclaim the input VAT on your purchases (except capital assets over £2,000), so the net benefit depends on your cost structure.

The Limited Cost Business Rule — The Critical Trap Since 2017

In April 2017, HMRC introduced the "limited cost business" rule after the FRS was being widely used as a profit mechanism by service businesses with very low costs. The rule is simple: if your business spends less than 2% of your VAT-inclusive turnover on goods in a VAT period — or less than £1,000 per year — you are a "limited cost business" and must use a flat rate of 16.5%, regardless of your sector.

Crucially, for the purposes of this test, "goods" means physical goods — not services. Accountancy fees, insurance, rent, wages, and software subscriptions do not count as goods. For most service businesses — consultants, IT contractors, freelancers, solicitors, architects, and similar professionals — the 16.5% limited cost rate almost always applies, making the FRS financially unattractive.

FRS Eligibility and Thresholds

To join the FRS, your VAT-taxable turnover (excluding VAT) must not exceed £150,000 at the time of application. Once on the scheme, you must leave if your annual VAT-inclusive turnover exceeds £230,000. You cannot join the FRS if you have left it voluntarily in the past 12 months, if you are closely associated with another FRS-registered business, or if you are within a VAT group. There are also specific exclusions for financial services businesses and some other sectors.

First Year Discount

If you are in your first year of VAT registration, HMRC offers a 1% discount on your flat rate percentage. For example, if your sector rate is 14.5%, you pay 13.5% in your first year. This applies for the first 12 months of VAT registration — note it is the first year of VAT registration, not necessarily the first year of trading. The discount does not apply to the limited cost business rate of 16.5%.

Sector Flat Rate Percentages — Key Examples

Accountancy or bookkeeping: 14.5%
Advertising: 12%
Computer and IT repair services: 10.5%
Consultant or IT: 14.5% (or 16.5% if limited cost)
Financial services: 12%
Hairdressing or beauty: 13%
Management consultancy: 14%
Pub: 6.5%
Retail (food): 4%
Restaurants (standard-rated food): 12.5%

The full table of sector percentages is published on gov.uk and is updated periodically. Always verify your sector rate directly with HMRC — using the wrong percentage can result in penalties.

Can I reclaim VAT on capital purchases while on the FRS?+

Yes — you can reclaim the input VAT on any single capital purchase costing £2,000 or more including VAT. This applies even while you are on the flat rate scheme and is claimed on your VAT return alongside your flat rate payment. Items costing less than £2,000 cannot be reclaimed separately.

What happens if I go over the £150,000 FRS threshold?+

If your VAT-exclusive taxable turnover exceeds £150,000 at registration, you cannot join the FRS. If you are already on the FRS and your VAT-inclusive turnover exceeds £230,000, you must leave the scheme. Write to HMRC and switch to standard VAT accounting from the beginning of your next VAT period.

Is the FRS still worth it for IT contractors?+

For most IT contractors, the limited cost business rule (16.5%) applies because they spend very little on goods. Running the numbers typically shows the FRS is not beneficial — the 16.5% on gross turnover usually equals or exceeds what they would pay under standard VAT accounting. Always check with your specific figures.