IT Contractor Tax Limited Company Accounts Accounting

For contracting businesses who are registered for Value Added Tax, there are four different ways you can account for VAT - 'standard' VAT accounting, the flat rate VAT scheme, the annual accounting scheme and the cash accounting scheme.

This guide provides a high level overview of each scheme. You should consult your accountant if you are unsure which scheme would be most advantageous to you.

1. Standard VAT accounting

WIth the standard VAT scheme, you account for VAT according to the invoice date, rather than the date VAT is received into your account (unlike the Cash Accounting scheme - below). This isn't necessarily advantageous from a cashflow point of view, as you'll end up paying VAT back to HMRC before you're received the VAT yourself. However, as you only pay VAT quarterly, you can accrue interest on any VAT collected prior to the VAT quarter end (although this may not be such an attractive incentive at the moment).

2. Annual VAT accounting.

This scheme allows businesses to submit just one annual VAT return rather than the usual four. They pay in installments throughout the year, then a balancing payment at the end of the year. This can help with cashflow and administration time, as businesses know what their liability will be on a monthly basis, but the balancing payment could come as a bit of a shock if trading has been particularly good. This is not widely used by IT contractor companies.

3. Flat Rate VAT scheme

With the flat rat VAT scheme, rather than accounting for the VAT on every payment received and made by your company, you pay a single flat VAT rate based on your turnover. The flat rate percentage varies according to industry types (for most IT contractors, the rate is 11.5%), and may be advantageous for contractors depending on how much their company spends on purchases.

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. Additionally, you can benefit from a 1% reduction in your flat rate percentage in your first year of VAT registration.

Read our in-depth guide to the flat rate VAT scheme.

4. Cash Accounting scheme

With this method, you only pay VAT back to HMRC once you have actually received it from your client. This is particularly good for cashflow reasons, and is therefore recommended for most contractors. The turnover threshold for the CAS is now £1.35m (more than adequate for most contractors). However, joining the CAS means you can't reclaim VAT on purchases until you pay your suppliers.

The scheme is easy to join, and you don't need to inform HMRC. You can read more about this way of accounting for VAT in Bytestart's guide to the VAT cash accounting scheme.

Your company may well benefit from an alternative way of accounting for VAT, aside from the standard scheme. Your contractor accountant should be able to advise you which method is best given your financial circumstances.