Flat rate VAT: is it worth it?
Most IT contractors spend too little on goods to pass the limited cost trader test, so they pay 16.5% rather than the 14.5% IT rate. At £110,000 a year with £500 of goods that still saves £220 over standard VAT, until your input VAT goes above £220.
Rates for the 2026/27 tax year. Checked 7 November 2026.
| Turnover including VAT | £132,000.00 |
|---|---|
| 2% of it | £2,640.00 |
| Minimum spend a year | £1,000.00 |
| Goods spend needed to pass | £2,640.00 |
| Your goods | £500.00 |
| Result | Limited cost trader |
| Rate applied (16.5% limited cost rate) | 16.5% |
|---|---|
| Flat rate VAT to HMRC | £21,780.00 |
| VAT you charge at 20% | £22,000.00 |
| Less input VAT | − £0.00 |
| Standard VAT to HMRC | £22,000.00 |
| Flat rate pays less by | £220.00 |
To break even on standard you would need input VAT of £220.00 a year. Spending £2,140.00 more on relevant goods would pass the test, but only buy goods the business needs. HMRC applies the test to each VAT return period, so a quarter with little spending can put you on 16.5% for that quarter.
A worked example
An IT contractor bills £110,000 a year before VAT and spends £500 on goods. With 20% VAT the invoices total £132,000. To pass the limited cost trader test the goods would need to reach 2% of that, £2,640, and at least £1,000. £500 falls short of both, so the rate is 16.5%, not the 14.5% IT rate.
16.5% of £132,000 is £21,780. Under standard VAT with no input VAT to reclaim, the company pays over the £22,000 it charged. The flat rate saves £220 a year. Any input VAT above £220 would make standard VAT the cheaper scheme.
If the same contractor bought £3,000 of goods, the test would pass and the rate would drop to 14.5%. The flat rate bill becomes £19,140 and the saving £2,860. In the first year of VAT registration the 16.5% rate becomes 15.5%, a bill of £20,460 and a saving of £1,540.
Why the result moves
The flat rate applies to VAT-inclusive turnover, so every £1,000 of extra billing adds £1,200 to the base. The goods test moves with turnover too, because it is 2% of the same VAT-inclusive figure. Input VAT only changes the standard side, and a business with real costs reclaims more there than the flat rate can match. The trade you pick only matters once you pass the goods test, because a limited cost trader pays 16.5% whatever the trade.
When this calculator is wrong for you
- Your spending is uneven. HMRC applies the goods test to each VAT return period, and this calculator uses a full year.
- You make zero-rated, exempt or overseas supplies, which change flat rate turnover.
- You buy capital goods of £2,000 or more, whose VAT you can reclaim on either scheme.
- Your turnover is near the £150,000 joining limit or the £230,000 leaving limit.
Questions people ask
What counts as relevant goods?
Goods used only for your business. HMRC excludes services of any kind, food or drink for you or your staff, capital expenditure goods, and vehicles, vehicle parts and fuel unless you are in the transport trade. Software subscriptions, accountancy, phone contracts and coworking space are services, so they do not count. The test uses what you spend including VAT (VAT Notice 733, paragraphs 4.4 and 4.6).
Why are most IT contractors limited cost traders?
At £110,000 turnover you need £2,640 of goods a year to pass, and most of what a contractor buys is services. A laptop is usually a capital item and is excluded. Unless you buy stationery, small equipment or other consumables in quantity, you pay 16.5%, not the 14.5% IT rate.
How does the 1% first-year discount work?
You take one percentage point off your flat rate until the day before the first anniversary of your VAT registration. It runs from when you registered for VAT, not from when you joined the scheme, and it applies to the 16.5% rate too, which becomes 15.5%.
Can I leave the scheme?
Yes, at any time, by writing to HMRC. You must then wait 12 months before you can rejoin. You also have to leave if you stop being eligible.
What are the turnover limits for joining and leaving?
You can join if you expect VAT taxable turnover in the next year to be £150,000 or less, excluding VAT. You must leave once your total income for the year, including VAT and exempt income, is more than £230,000. Both limits are in VAT Notice 733 (paragraphs 2.5, 3.1 and 3.5) and on gov.uk/vat-flat-rate-scheme.
Does the flat rate scheme change what I invoice?
No. You still charge 20% VAT and show it on the invoice in the usual way. The scheme only changes what you pay HMRC: a percentage of the VAT-inclusive total instead of the VAT you charged less the VAT you paid.
Can I reclaim VAT on expenses under the flat rate scheme?
Only on a single purchase of capital goods costing £2,000 or more including VAT. Everything else, including the VAT on goods that count for the 2% test, stays unreclaimed. Put your input VAT into the calculator to see what standard VAT would give back.
How this is worked out
Turnover including VAT is your net turnover plus 20%. The goods needed to pass the limited cost trader test are the larger of 2% of that figure and £1,000; spending less puts you on 16.5%, otherwise your trade's rate from HMRC's published list applies. In the first year of registration one percentage point comes off. Flat rate VAT is that rate times turnover including VAT. Standard VAT is 20% of net turnover less the input VAT you enter. The difference between the two is the saving or cost, and the break-even input VAT is the VAT you charge less the flat rate bill. Figures are rounded to the penny.
Full formulas, rounding rules and test cases are on the methodology page. Every rate update is listed in the changelog.