Flat Rate VAT Calculator
Calculation Results
Understanding the Flat Rate VAT Scheme
The Flat Rate VAT Scheme is designed to simplify taxes for small businesses. Instead of calculating the difference between the VAT you charge on sales and the VAT you pay on expenses, you simply pay a fixed percentage of your gross turnover to the tax authority (HMRC in the UK).
How the Calculation Works
While standard VAT accounting requires you to track every purchase receipt, the Flat Rate calculation is straightforward:
- Invoice your client: You still charge the standard VAT rate (e.g., 20%) on your net invoice amount.
- Calculate Gross Turnover: Add the Net amount and the VAT charged to get your total (Gross) turnover.
- Apply Flat Rate: Multiply your Gross Turnover by your specific sector's flat rate percentage. This is the amount you pay.
The 1% Discount
If you are in your first year of VAT registration, you are entitled to a 1% discount on your flat rate percentage. For example, if your sector rate is 14.5%, your effective rate for the first year becomes 13.5%.
Limited Cost Traders
If your business spends very little on goods (specifically, less than 2% of your turnover or less than £1,000 per year), you may be classified as a "Limited Cost Trader." In this scenario, you must use a higher flat rate of 16.5%, regardless of your business sector. This often neutralizes the financial benefit of the scheme.
Is the Flat Rate Scheme Right for You?
This calculator helps determine if you will make a "profit" from the scheme. This profit arises because the flat rate percentage is generally lower than the standard rate to account for the fact that you cannot reclaim VAT on purchases. If your actual expenses are very low (like many service-based freelancers or IT contractors), the Flat Rate Scheme can often result in paying less VAT than you collected, allowing you to keep the difference as additional income.