Is there a discount in the first year?

Yes. In your first year of VAT registration, a 1% discount applies to your flat rate (with a minimum flat rate of 1%).

Who cannot use the flat rate scheme?

The scheme is generally for businesses with turnover under the threshold, and a 'limited cost trader' rule forces a higher 16.5% rate if your goods costs are very low relative to turnover.

VAT Flat Rate Calculator

Work out the VAT due under the UK VAT Flat Rate Scheme — a fixed percentage of your gross turnover.

Sector sets an indicative rate

Flat rate (%)

Gross turnover (£, incl. VAT)

Flat rate VAT due

VAT payable to HMRC—

Standard VAT calculator

How the flat rate scheme works

Under the VAT Flat Rate Scheme you charge VAT on your sales as normal, but instead of reclaiming the input VAT on your purchases you pay HMRC a fixed percentage of your gross (VAT-inclusive) turnover. The difference between the VAT you charge customers and the flat rate you pay is what you keep to cover your input VAT and as a small surplus.

Flat rate VAT due = gross turnover × flat rate %. The percentage depends on your business sector, and a 1% discount applies in your first year of VAT registration.

Worked examples

Flat rate VAT at common percentages on £20,000 gross
Sector rate	VAT due	VAT charged (20%)	Roughly kept
4%	£800	£3,333.33	£2,533.33
10%	£2,000	£3,333.33	£1,333.33
12%	£2,400	£3,333.33	£933.33
14.5%	£2,900	£3,333.33	£433.33

“VAT charged (20%)” assumes you charged 20% VAT on a net figure producing £20,000 gross. If your flat rate exceeds 16.67%, the scheme is unlikely to benefit you — that is the reduced-cost trader trap.

Who can use it — and the limited cost trader rule

Generally available to VAT-registered businesses below the scheme turnover threshold.
Limited cost trader: if your spend on goods is very low relative to turnover, you must use a flat rate of 16.5% — which usually makes the scheme worse than standard accounting.
A 1% discount applies in your first year of registration.
The scheme is optional; you can leave it if standard accounting suits you better.

These percentages are indicative and simplified, and rates change. Confirm the current sector rates and eligibility with HMRC before using the scheme.

Frequently asked questions

How does the VAT flat rate scheme work?

You charge VAT as normal but pay HMRC a fixed percentage of your gross turnover instead of reclaiming input VAT.

How is flat rate VAT calculated?

Gross turnover × flat rate %. £20,000 gross at 10% = £2,000 due.

Is there a first-year discount?

Yes — 1% off your flat rate in your first year of VAT registration.

What is the limited cost trader rate?

16.5%, applied when your goods costs are very low relative to turnover.