The Flat Rate Scheme (FRS) is an HMRC scheme that simplifies VAT for small businesses. Instead of calculating the difference between output VAT and input VAT on every transaction, you pay a single fixed percentage of your gross (VAT-inclusive) turnover directly to HMRC.
You still charge your clients the standard 20% VAT rate on every invoice. The benefit comes from the difference between what you collect and what you pay HMRC — depending on your sector rate, you keep that margin.
Use the VAT Calculator homepage Flat Rate tab to calculate your FRS payment for any sector instantly.
The formula is straightforward:
FRS Payment = Gross (VAT-inclusive) Turnover × Your Flat Rate %
Example — IT consultant at 14.5%:
Invoice raised: £10,000 net VAT charged (20%): £2,000 Gross invoice total: £12,000 FRS payment to HMRC: £12,000 × 14.5% = £1,740 VAT you collected: £2,000 Amount you keep: £2,000 − £1,740 = £260
That £260 is yours. Across a year of consistent invoicing, it adds up.
| Flat Rate | Business Sector |
|---|---|
| 16.5% | Limited cost trader (applies when goods spend is below 2% of turnover) |
| 14.5% | IT and computer consultancy, data processing, financial services |
| 13% | Computer and IT repair services |
| 12% | Architects, surveyors, other professional services |
| 11% | Solicitors, advertising, public relations |
| 10.5% | Business services not listed elsewhere |
| 9% | Printing, general building and construction services |
| 8.5% | Catering, restaurants, takeaways |
| 7.5% | Hotels, accommodation, veterinary medicine |
| 6.5% | Dentistry |
| 4.5% | Farming and agriculture |
| 4% | Retailing food, confectionery, tobacco, children's clothing |
In 2017, HMRC introduced the limited cost trader category specifically to prevent service businesses with minimal goods costs from profiting excessively from the scheme.
You are a limited cost trader if your VAT-inclusive goods expenditure in a quarter is less than:
If either condition applies, you must use 16.5% — regardless of your sector.
At 16.5%, the maths rarely favours the FRS. A business paying 16.5% of gross effectively pays around the same as under standard VAT accounting — but loses the ability to reclaim input VAT on purchases. For most limited cost traders, the standard VAT scheme is the better choice.
| Rule | Detail |
|---|---|
| Join the scheme | VAT-taxable turnover of £150,000 or less (excluding VAT) |
| Must leave the scheme | Total VAT-inclusive turnover exceeds £230,000 |
| First year discount | Use a rate 1% lower than your sector rate in the first year of VAT registration |
| Capital goods | Can reclaim VAT on single capital purchases of £2,000 or more (VAT-inclusive) outside FRS rules |
You can only join the Flat Rate Scheme once you are VAT registered. Registration is required when your taxable turnover exceeds £90,000 in any rolling 12-month period.
If you are voluntarily registered below the threshold, you can still apply to join FRS — provided your expected turnover stays below £150,000.
Under FRS you still issue invoices showing 20% VAT. Your clients — if VAT-registered — reclaim that 20% as normal. From their perspective, nothing changes.
You still need to understand the reverse VAT calculation to verify the VAT shown on your own purchase invoices, even though you cannot reclaim it under FRS.
Generally no. Under FRS, you pay a flat rate and cannot reclaim input VAT on day-to-day purchases. The exception is capital assets costing £2,000 or more (VAT-inclusive) — you can reclaim VAT on these outside the flat rate calculation.
In your first year of VAT registration, HMRC allows you to reduce your flat rate percentage by 1%. An IT consultant normally at 14.5% pays 13.5% in year one.
You must leave when your VAT-inclusive annual turnover exceeds £230,000, or if you expect it to in the next 12 months. You can also leave voluntarily at any time.
Yes. Under FRS, your VAT return is simpler — one calculation instead of reconciling every invoice. But you still file quarterly returns through MTD-compliant software.