VAT for Small Business / Lesson 3 of 8
Standard versus flat rate
Charge the full rate, hand over less. There is a catch, and it has a name.
The short answer
- ✓ Flat rate pays a fixed percentage of gross turnover and forgoes input VAT
- ✓ Low-cost businesses usually gain, high-cost businesses usually lose
- ✓ Limited cost trader rules impose a much higher percentage on low-spend businesses
- ✓ A one-point discount applies in your first year of registration
How the two differ
| Standard | Flat rate | |
|---|---|---|
| VAT you charge | 20% | 20%, unchanged |
| What you pay HMRC | VAT charged less VAT on purchases | A fixed percentage of your VAT-inclusive turnover |
| Reclaiming input VAT | Yes, on everything eligible | No, except capital assets over £2,000 |
| Record keeping | Track input and output VAT | Much lighter |
Worked comparison
Sales excluding VAT £60,000
VAT charged at 20% £12,000
VAT on purchases £800
STANDARD pay 12,000 - 800 = £11,200
FLAT RATE 14.5% of £72,000 gross = £10,440
Flat rate is better by £760, and simpler.Sales excluding VAT £60,000
VAT charged at 20% £12,000
VAT on materials £6,000
STANDARD pay 12,000 - 6,000 = £6,000
FLAT RATE 9.5% of £72,000 gross = £6,840
Standard is better by £840.The rule of thumb: low costs favour flat rate, high costs favour standard.
The limited cost trader trap
If your spending on goods is very low, either below a small percentage of turnover or below a modest cash floor, you are a limited cost trader and must use a much higher flat rate percentage regardless of your sector.
This was introduced precisely because consultants and contractors with almost no costs were doing very well from sector rates designed for businesses that buy materials. Check whether it applies before assuming your sector percentage.
The bit HMRC does not spell out
There is a discount in your first year of VAT registration: your flat rate percentage is reduced by one point for those first twelve months. It applies automatically but plenty of businesses do not notice they had it, and are then surprised when their payments rise in year two for no apparent reason.
Common mistakes
- Assuming flat rate is always simpler and cheaper. High-cost businesses lose out.
- Ignoring the limited cost trader rules. They can wipe out the benefit.
- Trying to reclaim input VAT on flat rate. Not permitted, except large capital assets.
- Forgetting the first-year discount ends. Payments rise in year two.
Try it on your own numbers
This is the same calculator as the full tool page, using 2026/27 rates.
Flat Rate VAT
On the Flat Rate Scheme you pay a fixed % of your gross (VAT-inclusive) turnover, instead of the difference between VAT charged and VAT reclaimed.
HMRC sets a flat rate per trade sector (e.g. 14.5% accountancy, 12% IT, 16.5% limited-cost). Enter yours.
Under the Flat Rate Scheme you normally cannot reclaim this input VAT. We use it to show what the standard scheme would cost.
Flat rate VAT to pay
a year - / month at
- VAT element of turnover ()
- Net (ex-VAT) turnover
- Input VAT on purchases
- Standard scheme VAT due
Estimate only. Check your sector rate and eligibility with HMRC.
VAT due across turnover
Annual VAT payable as your turnover grows, at your current rate. The marker shows your turnover.
| Period | Flat rate VAT | Standard scheme | You keep |
|---|---|---|---|
Assumes turnover and purchases are spread evenly across the year. Most VAT returns are filed quarterly.
Compare saved scenarios
| Scenario | Flat rate VAT | Standard scheme | Difference | |
|---|---|---|---|---|
Key takeaways
- ✓ Flat rate pays a fixed percentage of gross turnover and forgoes input VAT
- ✓ Low-cost businesses usually gain, high-cost businesses usually lose
- ✓ Limited cost trader rules impose a much higher percentage on low-spend businesses
- ✓ A one-point discount applies in your first year of registration
Check you have got it
3 quick questions. No score is kept, and you can change your mind.
1. Under the flat rate scheme, can you reclaim VAT on your purchases?
2. Which business is more likely to benefit from flat rate?
3. What is a limited cost trader?
Sources
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