VAT Registration & Flat Rate
Calculator 2025/26
Covers the full VAT decision tree: whether you must register (£90,000 rolling threshold), whether voluntary registration makes sense, which scheme saves you money, and whether the limited cost trader rule wipes out your Flat Rate Scheme benefit. Enter your numbers once — the calculator does all three tests.
VAT registration threshold 2025/26
The VAT registration threshold has been £90,000 since April 2024. If your taxable turnover exceeds £90,000 in any rolling 12-month period, you must register for VAT within 30 days of exceeding it. Registration takes effect from the end of the month in which you crossed the threshold, or from an agreed earlier date.
There is also a forward-looking test: if you expect your taxable turnover to exceed £90,000 within the next 30 days alone, you must register before that 30-day period ends. The deregistration threshold is £88,000 — you can ask to deregister if your taxable turnover falls, or is expected to fall, below this level.
| Threshold | Amount | Action required |
|---|---|---|
| Mandatory registration | £90,000 | Register within 30 days of exceeding |
| Deregistration | £88,000 | Can apply to deregister |
| Flat Rate Scheme join | ≤ £150,000 | Apply when registering or after |
| Flat Rate Scheme exit | > £230,000 (inc. VAT) | Must leave scheme |
How the Flat Rate Scheme works
Under the standard VAT scheme, you pay HMRC the difference between VAT you charged on sales (output VAT) and VAT you paid on purchases (input VAT). Under the Flat Rate Scheme, you charge VAT to customers at the normal 20% rate but pay HMRC a fixed percentage of your gross (VAT-inclusive) turnover instead. You keep the difference.
The fixed percentage depends on your sector and is set by HMRC to broadly reflect average input VAT claims for that industry. Service businesses with low VAT-able purchases can often keep a meaningful “surplus” — especially in their first year when a 1% discount applies.
Quarterly invoicing: £30,000 net + £6,000 VAT = £36,000 gross received. Standard scheme: Pay HMRC £6,000 output VAT minus, say, £500 input VAT on expenses = £5,500 due. Flat Rate Scheme: Pay HMRC 14.5% × £36,000 = £5,220. FRS saving: £280 per quarter = £1,120 per year, plus less bookkeeping.
But if the IT consultant is a limited cost trader (spending under 2% of turnover on goods), the rate becomes 16.5%: 16.5% × £36,000 = £5,940 — now the FRS costs £440 more than the standard scheme per year.
The limited cost trader trap
Since April 2017, any business that spends less than 2% of its VAT-inclusive turnover on “relevant goods” (or less than £1,000 per year, if 2% would be higher) must use the 16.5% flat rate regardless of its sector. At 16.5%, the FRS produces almost no benefit for most service businesses — the scheme was designed to prevent service-heavy businesses from profiting disproportionately from the scheme.
“Relevant goods” is narrowly defined. It does not include: services of any kind, rent, fuel, vehicle costs, food and drink (unless reselling), stationery used in the business, or capital assets (even if under £2,000). Most consultants, freelancers, and agency workers will fail the limited cost trader test every quarter and must use 16.5%.
You are a limited cost trader if (a) your spend on relevant goods is less than 2% of your VAT-inclusive turnover in the period, OR (b) your annual spend on relevant goods is less than £1,000 (even if it exceeds 2%). The test must be applied every VAT return period — you can be a limited cost trader in one quarter but not another depending on goods purchases that period.
Flat Rate Scheme percentages — common sectors
| Sector | FRS rate |
|---|---|
| Limited cost trader (any sector) | 16.5% |
| Computer & IT consultancy / data processing | 14.5% |
| Management consultancy | 14.5% |
| Accountancy or bookkeeping | 14.5% |
| Labour-only building / construction subcontractor | 14.5% |
| Journalist / writer | 12.5% |
| Catering services (not hotels or pubs) | 12.5% |
| Financial services | 12.5% |
| Hairdressing & beauty treatment | 13% |
| Architect / civil engineer | 12% |
| Real estate agent | 12% |
| Photography | 11% |
| Advertising services | 11% |
| Cleaning or maintenance | 10% |
| Taxi or private hire | 10% |
| General building / construction (materials included) | 9.5% |
| Hotel or accommodation | 9% |
| Retailing (not food, drink, tobacco, newspapers) | 7.5% |
| Retailing food & children’s clothing | 4% |
A 1% discount applies in your first year as a VAT-registered business. Apply at the same time as your VAT registration using form VAT600FRS.
Frequently asked questions
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