What is the first-year VAT discount?

In your first year of VAT registration, you get a 1% discount on your flat rate percentage. For example, if your business category rate is 14.5%, you pay 13.5% in your first year. This applies for the first 12 months from your VAT registration date.

VAT Flat Rate Calculator

Q: What is the VAT Flat Rate Scheme?

The VAT Flat Rate Scheme is a simplified way of paying VAT to HMRC. Instead of tracking input and output VAT separately, you pay a fixed percentage of your gross turnover (including VAT). The percentage depends on your business category — for example, IT consultancy is 14.5% and retail food is 4%. You can join if your VAT-taxable turnover is £150,000 or less (excluding VAT).

Q: Am I a limited cost trader?

You are a limited cost trader if you spend less than 2% of your VAT-inclusive turnover on goods, or less than £1,000 per year on goods (whichever is greater). 'Goods' means physical items — not services, capital goods over £2,000, food/drink for staff, or vehicle costs. Limited cost traders must use the 16.5% flat rate regardless of business category.

Q: Can I reclaim VAT on purchases under the Flat Rate Scheme?

Generally no — under the Flat Rate Scheme you cannot reclaim input VAT on purchases. The only exception is capital goods costing £2,000 or more including VAT (a single purchase). For example, buying equipment for £2,400 inc VAT lets you reclaim the £400 VAT on that item.

Q: When must I leave the Flat Rate Scheme?

You must leave the Flat Rate Scheme if your total business income (including VAT) exceeds £230,000 in any 12-month period. You can also leave voluntarily at any time. After leaving, you cannot rejoin for at least 12 months. Source: HMRC VAT Notice 733.

Compare the VAT Flat Rate Scheme with Standard VAT for 2025/26. Check if you are a limited cost trader, find the break-even point for purchases, and see which scheme saves your business more money.

Compare VAT Flat Rate Scheme with Standard VAT accounting

Annual turnover (exc VAT)

Your VAT-exclusive annual revenue

Business category

HMRC flat rate category from VAT Notice 733

Annual purchases (inc VAT)

Total business purchases including VAT

First year of VAT registration

1% discount off flat rate in your first year

Try another scenario

How to Use This Calculator

Flat Rate vs Standard tab

Enter your annual turnover (exc VAT), select your business category from the HMRC list, and enter your annual purchases (inc VAT). The calculator compares what you would pay under the Flat Rate Scheme versus the Standard VAT Scheme. Expand "More options" to apply the first-year 1% discount if you registered for VAT in the last 12 months.

Limited Cost Trader tab

Enter your annual goods purchases and turnover to check whether you qualify as a limited cost trader. If your goods cost less than 2% of turnover or less than £1,000 per year, you must use the 16.5% flat rate regardless of your business category. The calculator shows the financial impact and compares with the standard scheme.

Break-Even Analysis tab

Enter your turnover and business category to find the exact level of VAT-recoverable purchases where the Standard Scheme becomes cheaper than the Flat Rate Scheme. The calculator shows savings at multiple purchase levels so you can see how your actual spending compares.

Share your result

Every input is encoded in the URL. Click Share to send your exact scenario to an accountant, business partner, or save it for later.

The Formula

The Flat Rate Scheme simplifies VAT by applying a single percentage to your gross turnover:

Flat Rate VAT Payment = Turnover (inc VAT) × Flat Rate %

Where: Turnover inc VAT = Turnover (exc VAT) × 1.20

Standard Scheme VAT Payment = Output VAT − Input VAT
Output VAT = Turnover (exc VAT) × 20%
Input VAT = Purchases (inc VAT) × (20 / 120)

Limited Cost Trader Test:
If goods < 2% of turnover OR goods < £1,000/year → rate = 16.5%

Break-Even Purchases = (Output VAT − Flat Rate Payment) × 6

The key advantage of the Flat Rate Scheme is simplicity — you do not need to track input VAT on every purchase. For many service businesses with low expenses, the flat rate is also lower than the effective standard scheme rate, meaning you keep a portion of the VAT charged to customers.

However, if your business has significant VAT-recoverable purchases, the standard scheme may be cheaper because you can reclaim input VAT. The break-even analysis helps you find exactly where the crossover occurs.

Example

Tom — IT Consultant, London

Tom runs an IT consultancy with annual turnover of £80,000 (exc VAT). His business purchases total £3,000/year (inc VAT). He is in his second year of VAT registration.

Flat Rate vs Standard tab

Annual turnover (exc VAT)£80,000

CategoryComputer and IT consultancy (14.5%)

Annual purchases (inc VAT)£3,000

Turnover inc VAT£96,000

Flat Rate Scheme payment£13,920

Standard Scheme payment£15,500

Annual saving with Flat Rate£1,580

Tom saves £1,580 per year using the Flat Rate Scheme. His low purchases mean there is very little input VAT to reclaim under the standard scheme, making the flat rate the clear winner.

Limited Cost Trader check

Tom’s goods purchases (physical items only, not services) are approximately £800/year. Since this is less than £1,000, he is a limited cost trader and his flat rate would be 16.5% instead of 14.5%. At 16.5%, his flat rate payment would be £15,840 — making the standard scheme slightly better. Tom should track goods purchases carefully and consider whether buying more equipment would take him above the threshold.

FAQ

What is the VAT Flat Rate Scheme? ▼

The VAT Flat Rate Scheme is a simplified way of paying VAT to HMRC. Instead of tracking output VAT on every sale and input VAT on every purchase, you pay a fixed percentage of your gross turnover (including VAT). The percentage depends on your business category — for example, IT consultancy is 14.5% and retail food is 4%. You can join if your VAT-taxable turnover is £150,000 or less (excluding VAT). The scheme saves time on VAT record-keeping and, for many businesses, results in paying less VAT than under the standard scheme.

Am I a limited cost trader? ▼

You are a limited cost trader if you spend less than 2% of your VAT-inclusive turnover on goods, or less than £1,000 per year on goods (whichever is greater). “Goods” means physical items used by your business — it does not include capital goods over £2,000, food or drink for yourself or employees, or vehicle costs (fuel, insurance, maintenance). If you are a limited cost trader, you must use the flat rate of 16.5% regardless of your business category, which often makes the Flat Rate Scheme less attractive.

What is the first-year discount? ▼

In your first year of VAT registration, you get a 1% discount on your flat rate percentage. For example, if your category rate is 14.5%, you would pay 13.5% in your first year. This discount applies for the first 12 months from the date of your VAT registration (not the date you joined the Flat Rate Scheme). The discount makes the Flat Rate Scheme particularly attractive for newly VAT-registered businesses.

Can I reclaim VAT on purchases under the Flat Rate Scheme? ▼

Generally, no. Under the Flat Rate Scheme, you cannot reclaim input VAT on your purchases. The exception is capital goods costing £2,000 or more including VAT (a single purchase, not accumulated). For example, if you buy a computer for £2,400 inc VAT, you can reclaim the £400 VAT on that purchase. This is the only circumstance where you can reclaim VAT while on the Flat Rate Scheme.

When must I leave the Flat Rate Scheme? ▼

You must leave the Flat Rate Scheme if your total business income (including VAT) exceeds £230,000 in any 12-month period, or if you are no longer eligible (for example, you join a VAT group). You can also choose to leave voluntarily at any time if the standard scheme would be more beneficial. You must write to HMRC to leave. After leaving, you cannot rejoin for at least 12 months. Source: HMRC VAT Notice 733.

Related Calculators

Add This Calculator to Your Website

Embed the sum.money VAT Flat Rate Calculator on your site. Free, responsive, always up-to-date.