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Flat rate VAT is your sector percentage applied to VAT-inclusive turnover. "Limited cost traders" (goods under 2% of turnover or under GBP 1,000 a year) must use 16.5%, which removes almost all the benefit. First-year registrants get a 1% discount. Joining requires expected turnover of GBP 150,000 or less ex VAT. Not tax advice.
What The VAT Flat Rate Calculator Works Out
- Flat rate scheme VAT paid: your sector percentage applied to VAT-inclusive turnover. A consultancy on 14.5% with GBP 80,000 of net turnover bills GBP 96,000 gross and pays GBP 13,920, with no input VAT to track.
- Standard scheme VAT paid: 20% output VAT on sales minus the VAT reclaimed on costs. The same business with GBP 5,000 of VATable costs pays GBP 16,000 less GBP 1,000, GBP 15,000.
- Better scheme: whichever leaves more in the business, with the annual difference. The sum deserves an annual re-check as costs change, and it is precisely the comparison an accountant would start with.
- Operating rules: you can join with expected VATable turnover of GBP 150,000 or less and must leave once gross income passes GBP 230,000. The flat percentage applies to all business income, including zero-rated and exempt sales.
- First-year discount (advanced): newly VAT-registered businesses get 1% off their flat rate for the first year of registration.
- Limited cost trader test (advanced): since 2017, businesses spending under 2% of gross turnover (or under GBP 1,000 a year) on goods must use 16.5% regardless of sector. Goods means physical items for the business, excluding capital items, food, vehicle fuel, services and software, so most contractors are caught. 16.5% of gross is 19.8% of net, leaving pennies of benefit and often a loss.
- Capital assets of GBP 2,000 or more (advanced): the one exception to "no input VAT" under the flat rate: VAT on a single capital purchase of GBP 2,000 or more including VAT can still be reclaimed, and is deducted from both schemes here.
- Zero-rated or exempt sales (advanced): these carry no output VAT on the standard scheme but are still charged the flat percentage under the flat rate, which quietly punishes mixed businesses.
- Quarterly payment and VAT kept (advanced): what each quarterly return would cost, and how much of the 20% you charge customers stays with you under the flat rate to cover your own input VAT.
- Break-even costs (advanced): the level of VATable costs at which the two schemes cost the same. Spend more than this and the standard scheme wins.
Source and further reading: GOV.UK (HMRC): VAT flat rate scheme.