Independent Contractor Services
Free IR35 & Contractor Tax Review
Call free 0800 195 3750 | Email

IT contractors and the flat rate VAT scheme

Published on 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.

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.

Contractor Services

Income Protection (PHI) and Contractor Mortgages - Specialist quotes
Free Umbrella Company - Save over £1400 p.a. on fees with Springboard
Contract Experts - ClearSky Accounting on 08000 325 326
Qdos - IR35 experts - Providers of low cost insurances
Parasol - the UK's favourite umbrella company
Free IR35 & Tax Review - Call ICS on 0800 195 3750
K & B Accountancy Group- Fixed fee accounting for contractors only £75pm
Cloud 9 Group - Umbrella Solutions only £19.95 per week
Umbrella4Contractors - Low fees, same day setup
Professional Indemnity Insurance - Contractor PI cover

Contract Eye - for New IT Contractors

IT contractors and the flat rate VAT scheme

Contractor Services

Further Reading