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IT contractors and the flat rate VAT scheme
Posted Mar 19, 2009
Please note that from 1st January 2010, the fixed rate percentages used within the Flat Rate VAT Scheme were revised. You can access the new percentages here. These rates will change again from 4/1/2011 - we will update this article nearer the time.
Alongside the standard VAT scheme, limited company IT contractors may prefer to operate via the flat rate VAT scheme which was introduced in 2002.
The main aim of the flat rate scheme was to simplify VAT calculations for small businesses, whereby companies charge clients at the standard VAT rate (17.5% from 1st January 2010), but repay the revenue at a lower flat rate. For most IT contractors, the fixed rate is 13%.
In essence, instead of paying HMRC the total VAT charged on invoices minus any input VAT you may reclaim, you charge a fixed percentage of your gross turnover and pay that amount to HMRC each year.
If you buy a lot of computer equipment for example, you may be worse off under the flat rate scheme, but many other IT contractor companies may benefit.
Notes related to the Flat Rate VAT Scheme
- Businesses in their first year of VAT registration can benefit from a 1 per cent reduction in the flat rate.
- You can apply if your annual taxable turnover (not including VAT) will be £150,000 or less; and your annual total turnover (including VAT) will be £187,500 or less.
- If you buy a single capital asset with an invoice value, including VAT, of £2,000 or more you can claim the input tax on your VAT return in the normal way.
- You continue to invoice clients at the normal VAT rate (currently 17.5%).
- You can voluntarily leave the flat rate scheme at any time.
- You can continue in the scheme unless your turnover breaches the £225,000 mark.
Flat Rate VAT Example
Here is an example for a contractor company with gross contract billings of £40,000, and VAT on expenses incurred of £500.
Traditional VAT Calculation
Total Billings @ £40,000
Output VAT @ 17.5% = £7,000
(minus) Input VAT @ £500
Total VAT Payable would be £6,500
Flat Rate Scheme
Total Billings @ £40,000
Output VAT @ 17.5% = £7,000 (Added to total for purposes of calculating flat rate VAT)
Total VAT Payable would be 13% of £47,000 = £6,110
This case uses the 13% percentage applied to IT contractors - other professions may have different rates.
Also remember, you have a 1% VAT deduction for the first year using the flat rate scheme.
In many examples where the IT contractor company doesn't need to claim much input VAT back, the contractor may well be better off by joining the flat rate VAT scheme.
Always check with your accountant before deciding which scheme to join.
For further information, read HMRC's guide to the Flat Rate VAT scheme.
Please scroll down for related articles
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