IT Contractor Tax - Accountants for Contractors

When you set up as a limited company contractor, there are several VAT schemes open to your business.

Although you are not obliged to register for VAT until your company turnover reaches £77,000 in a 12 month period (2012/13 tax year), the vast majority do regardless, as not only does VAT registration provide a more professional image on an invoice, but your company may actually be better off as a result.

HMRC operates a number of VAT schemes. Here is a very high level summary of each one:

1. Standard

Most businesses use the 'standard' VAT scheme, whereby you apply VAT to outbound invoices (at 20%). Your VAT liability arises when you raise each invoice, rather than when you receive payment. Each quarter you calculate the amount of VAT you have charged, and deduct any VAT you have paid out, and pay the difference to HMRC.

2. Cash Accounting

This scheme is very similar to the standard scheme, except that you only account for VAT you have charged when you actually receive payment from your client. This can be very helpful from a cash flow angle, especially if you have any unreliable clients.

3. Flat Rate Scheme

The Flat Rate Scheme was designed to cut down the time companies have to spend accounting for VAT. Rather than accounting for every single input and output transaction you may have, you simply apply a flat rate percentage to your turnover. For the vast majority of contractors, this rate is currently 14.5% (2012/13).

Although you cannot reclaim VAT on purchases via this scheme, you can reclaim VAT one single-transaction purchase of over £2,000.

In addition, you can take advantage of a 1% discount on the flat rate during your first year using the scheme.

Depending on your company's financial profile, many contractors will be better off using the Flat Rate Scheme. You should consult your accountant to determine which scheme would suit you best.

4. Other VAT Schemes

In addition to the schemes commonly used by contractors, HMRC also operates the Annual Accounting Scheme, whereby you make one single VAT return each year, and make 9 monthly or 3 quarterly interim payments throughout the year. Further VAT schemes are available to retailers.

Registering for VAT

You accountant will typically take care of your VAT registration, otherwise you can register online. Find our more here.

Paying your VAT liabilities

Regardless of which scheme you join, you will need to account for VAT each quarter, submit your quarterly return online, and settle any outstanding tax you owe electronically.

Further information

Our in-depth guide to the Flat Rate VAT Scheme.

Our guide to the Standard VAT Scheme.

For the ultimate source for all things VAT-related, visit HMRC's VAT pages.