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IT Contractors and the Flat Rate VAT Scheme  

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 rates (17.5%), but repay the revenue at a lower flat rate. For most IT contractors, the fixed rate is 13%.

In essence, instead of paying Customs 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 Customs 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 17.5% rate.

  • You can voluntarily leave the flat rate scheme at any time.
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 @ £7,000
(minus) Input VAT @ £500

Total VAT Payable would be £6,500

Flat Rate Scheme

Total Billings @ £40,000
Output VAT @ £7,000 (Added to total for calculation of flat rate VAT)

Total VAT Payable would be 13% of £47,000 = £6,110

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 on the Flat Rate VAT Scheme, and how to apply - visit the HM Revenue & Customs website.


Published on Jun 6, 2006


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