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What is the Flat Rate VAT Scheme? An overview for IT contractors
Posted Oct 17, 2011
Although most UK businesses operate via the standard VAT scheme, limited company IT contractors may be better off by using the flat rate VAT scheme, which came into play in 2002.
The flat rate scheme makes the calculation of VAT far simpler than the standard scheme. Although you charge clients the standard 20% VAT rate on all invoices, you repay VAT on an annual basis of 14.5% (the percentage which applies to most contractors since January 2011).
Whether or not you are financially better off by operating through the flat rate VAT scheme or not will depend on your own circumstances. If you buy a lot of equipment, for example, you may not benefit, as you cannot reclaim the VAT on purchases.
Flat rate VAT scheme notes
- In your first year of registration, you receive an extra 1% reduction in the flat rate percentage you apply. In the case of most contractors, you will therefore repay 13.5% to HMRC.
- You can join the scheme if your annual taxable turnover (excluding VAT) will be £150,000 or less; and your annual total turnover (including VAT) will be £187,500 or less.
- If you outlay £2,000 or more on a single capital asset (including VAT) you can claim the input tax on your VAT return in the normal way.
- Although you pay back a lower percentage under the scheme, you should continue to invoice clients at the standard VAT rate (currently 20%).
- Your company can elect to leave the flat rate scheme at any time.
- You can continue in the flat rate scheme unless your turnover breaches the £230,000 mark.
Flat rate VAT scheme - an example
Here is an example for a contractor company with gross contract billings of £40,000, and VAT on expenses incurred of £500.
Standard VAT Calculation
Total Billings @ £40,000
Output VAT @ 20% = £8,000
(minus) Input VAT @ £500
Total VAT Payable would be £7,500
Flat Rate Scheme
Total Billings @ £40,000
Output VAT @ 20% = £8,000 (Added to total for purposes of calculating flat rate VAT)
Total VAT payable would be 14.5% of £48,000 = £6,960
This example uses the 14.5% percentage applied to IT contractors since 4th January 2011. Other professions may have different rates.
(Don't forget that you have a 1% reduction in the percentage you pay to HMRC for the first year using the flat rate scheme).
In general, if you are unlikely to make many purchases through your limited company, you may well be better off by joining the flat rate VAT scheme.
Always check with your accountant before deciding which scheme to join.
For more information, consult HMRC's guide to the flat rate VAT scheme. All content ©Contract Eye Ltd. Protected by Copyscape. Please scroll down for related articles.
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