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Value Added Tax - VAT guide for IT contractors

Published on Feb 17, 2009 |

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Value Added Tax (VAT) is a tax on most goods and services, and is collected at every stage of production and distribution.

Most business-related goods and services are therefore be subject to VAT.

Rates of VAT

There are several UK VAT rates, the standard rate being 17.5%.

From 1st December 2008 until 31st December 2009, the standard rate was temporarily lowered to 15%.

Registering for VAT

IT contractors with limited companies should register for VAT if the value of their gross billings in the past 12 months or less has exceeded the current VAT registration threshold of £68,000 (from 1st May 2009 - previously it was £67,000), or the value of their billings in the next 30 days alone is expected to exceed this threshold.

It is important to remember that turnover is the amount of money going through the business, not just the profit.

Even if your turnover lies below the current threshold, you can still register for VAT, since there may be business benefits in doing so (worth checking with your contractor accountant or direct with HMRC).

How does VAT work?

Basically, a business will pay VAT on all purchases it makes (known as "input tax") and then charge VAT on all sales it makes (known as "output tax").

If a VAT-registered business receives more output than input tax in a VAT period, it will pay the difference to HMRC, otherwise HMRC will refund the difference if the business pays more VAT than it receives.

Paying VAT

Once you are VAT registered, you will need to update your invoicing templates to take account of the additional tax you need to charge your customers.

Most contractors (or their accountants) will receive a green VAT return every quarter. Your basic VAT calculations and payment should be returned to HMRC no later than one month following the end of your VAT quarter.

Most contractor accountants will take care of VAT calculations on your behalf. You will send your accountant a cheque each quarter to cover your VAT liabilities, or increasingly your VAT calculations and payment will be submitted online.

Flat Rate VAT?

You may also be interested in registering to join the Flat Rate VAT scheme which could save you money if you do not claim a great deal of input VAT.

This article provides a very high level outline of VAT. For more details, please read HMRC's VAT pages, or the comprehensive VAT section on our small business site, Bytestart.