Flat Rate VAT Scheme for contractors explained

Flat Rate VAT Scheme for contractors explained

Once a business reaches a turnover of £82,000 within a twelve month period, it is a legal requirement to register for VAT and subsequently, charge VAT (20%). Businesses who are registered for VAT must charge this to their clients and customers (most commonly at a rate of 20% but occasionally at either a reduced or zero rate), but may reclaim any VAT paid out on business-related goods and services (expenses).

 

For many contractors however, the level of VAT which can be reclaimed is minimal, often as a result of the ‘service’ offered being time, knowledge and experience. In most cases, the level of VAT paid to HMRC by a business equals the difference between VAT charged and VAT claimed back. However, under the Flat Rate Scheme, this is calculated at a fixed rate based on their activities.

 

Fixed Rate VAT

In short, the Flat Rate VAT Scheme means a contractor must pay only a fixed rate of VAT and may keep the difference. In this instance, under the Flat Rate VAT Scheme, the VAT paid out on goods and services cannot be reclaimed unless on certain capital purchases costing more than £2,000 (in one transaction).

 

Eligibility

To be eligible to join the Flat Rate VAT Scheme, the business must have turnover of  less than £150,000 per annum (excluding VAT). Whilst it is a legal requirement to register for VAT once turnover exceeds £82,000 in a twelve-month period, it is possible for businesses to voluntarily register when turnover is below this threshold.

 

How it works

Somewhat different to standard VAT accounting, on the Flat Rate Scheme, you’ll pay a percentage of turnover in VAT as opposed to paying the difference between the amount of VAT charged to clients, less the VAT reclaimed on purchases.

 

The Flat Rate VAT Scheme fixed rate does differ from industry to industry however, to offer a number of examples:

 

  • Computer and IT consultancy or data processing – 14.5%
  • General building or construction services – 9.5%
  • Management consultancy – 14%

 

Whilst this is by no means a comprehensive list of industries within which contractors are commonly seen, the above gives an idea as to how the rates can differ.

 

When calculating the VAT due, the fixed-rate percentage of the gross is taken. This is calculated on the value of sales (including VAT) multiplied by the percentage based on the business’ main activity. As an example, on a sale of £100 (which becomes £120 once VAT is added), an IT Consultant would pay £17.40 to HMRC (14.5% of £120).

During the first year of registration, businesses will  be entitled to an additional 1% deduction on the fixed rate.

 

What this means for contractors

As a contractor, it may often be the case that you have very few expenses in comparison to other businesses. In this respect, you may find that the scheme is perfect for you, although this can differ between individuals depending upon turnover and expenses claimed.

 

Benefits of the scheme lie not only in the fact that it is possible to profit from being VAT registered if there would be very little that could be claimed back under the standard scheme, but also that the admin associated with filling a VAT return is significantly reduced. As opposed to being required to submit information on the VAT charged out as well as putting together a claim back for VAT paid out, on the flat rate, the VAT payable can be calculated solely from knowing the revenue.

 

Whilst not for all businesses, if you’re turning over no more than £150,000 in a twelve month period and don’t find yourself claiming much back in the way of expenses, it’s something seriously worth considering; even if you’re not reaching the £82,000 threshold.

 

You can find out more information about the Flat Rate VAT Scheme on the Gov.uk website, or the VAT – Could you be paying too much? Flat Rate VAT? blog from Intouch Accounting. However, if you’d prefer a chat with one of our friendly and helpful advisers, why not give us a call today on 01202 375 562 or fill in our contact form and we’ll call you back.

 

This blog has been prepared by Intouch Accounting. While we have made every attempt to ensure that the information contained in this blog has been obtained from reliable sources, Intouch is not responsible for any errors or omissions, or for the results obtained from the use of this information. This blog should not be used as a substitute for consultation with professional accounting advisers. If you have any specific queries, please contact Intouch Accounting.

Top Tax Tips: VAT Flat Rate Scheme

Top Tax Tips: VAT Flat Rate Scheme

The majority of contractors choose to become VAT registered, even if they are not yet earning the threshold amount for registration, as it can give a very professional impression to prospective clients.  HMRC offers several types of VAT accounting schemes which are suited to different sizes and types of businesses. Choosing the best matched VAT accounting system for your business can make a big different to the ease of administering your contractor accounts as well as offering the possibility of making tax savings. Many limited company contractors choose the Flat Rate VAT scheme as it makes their limited company accountancy much easier. Its more straightforward rules also mean errors are less likely which gives welcome peace of mind.

The Flat Rate Scheme

The Flat Rate Scheme for VAT came into force in 2002 as a way to help make VAT accounting much simpler for the smaller business. If you’re a contractor limited company with sales of up to £150,000 (excluding VAT) across any individual tax year you can be eligible to join this Scheme. Once you have registered, even if your VAT inclusive sales go over this amount you can still reap the benefits, up to a cap of £230,000. If you go over this amount though you will no longer eligible and will have to leave the Scheme.

Under the Flat Rate Scheme a contractor must still charge the relevant rate of VAT on invoices to their clients for the products or services sold (eg: 20%) but the VAT payment owed is calculated as a set ‘flat’ percentage of the contractor company’s total VAT inclusive turnover. The ‘flat’ percentage applied varies from industry to industry, for example:

 

Category of business Applicable percentage
Computer and IT consultancy or data processing 14.5
Computer repair services 10.5
Financial services 13.5
Management consultancy 14

 

 

You cannot claim back VAT on your purchases unless you buy an asset for over £2,000, as the set percentage charged takes this into account. However, you save time because you don’t need to work out which purchases you can and can’t claim VAT back for and you don’t need to record the VAT you charge on your sales or purchases in your contractor accounts. Other potential benefits to contractors of using the Flat Rate Scheme include:

  • Although you need to show the rate of VAT applicable separately on your invoices, unlike standard VAT accounting you are not required to record the VAT amounts of every sale and business purchase made. This means the paperwork and admin involved is simpler and less time consuming.
  • In your first year of VAT registration you are eligible for a 1% discount in your flat rate percentage. This applies up to the day before your first anniversary of becoming VAT registered. This offers a welcome tax break.
  • It’s a simpler scheme to follow as there aren’t so many rules as standard VAT.  This makes it easier to get it right, which makes it less stressful.
  • As the Flat Rate Scheme is a set percentage of your sales you have a much better idea of how much VAT you’ll owe to HMRC.

 

For many contractors these benefits offer very worthwhile advantages and the potential for tax savings. However, check with a contractor accountant to make sure that this is the best option tax-wise for your own contractor limited company. For some business types there can be potential disadvantages of using the Flat Rate Scheme which might make it unsuitable. This may be the case for you if:

  • You make a lot of standard rate business purchases – as you generally can’t claim back the VAT on these purchases.
  • You’re currently registered under standard VAT accounting and frequently get a VAT repayment.
  • You issue a lot of zero-rated or VAT exempt invoices – as you won’t be able to charge any VAT to the client, but will effectively be paying it out from your total sales income.
  • You have rental income as the flat rate will be payable on it too.

 

At Intouch our clients can easily keep up to date with contractor tax issues which affect their contractor limited company. Our experienced personal accountants are also on hand to provide personalised advice to ensure our clients take home the maximum possible post-tax income. Contact us to find out more.

 

This blog has been prepared by Intouch Accounting. While we have made every attempt to ensure that the information contained in this blog has been obtained from reliable sources, Intouch is not responsible for any errors or omissions, or for the results obtained from the use of this information. This blog should not be used as a substitute for consultation with professional accounting advisers. If you have any specific queries, please contact Intouch Accounting.

New contractors’ guide to Tax Return Deadlines

New contractors’ guide to Tax Return Deadlines

With the 31st of January deadline for online self-assessment fast approaching, it is important that all new Limited Company contractors are aware of all personal and company tax return deadlines.

Filing all personal and company tax information required and making payment to HMRC within their specified deadlines is vital. Firstly, it ensures you don’t end up having to pay out for late penalty amounts. It’s also good business practice to keep within these deadlines as it will mean that you’re generally keeping your contractor accounting and tax affairs fully up to date. Ideally you should be aware of the key deadline dates which apply to you, but if you’re unsure a contractor accountant will be able to help.

As a Limited Company contractor you will be required to file a number of different types of tax return. The specific returns applicable will partly depend on the size and type of business involved but most contractors will usually need to file the following:

  • Self-Assessment tax return – relating to your own personal taxable income.
  • Employer related tax returns e.g. National Insurance Contributions (NIC), Pay as you earn (PAYE) and other employee related returns for yourself (as an employee of your own company) and any other employees.
  • Company tax return for your business.
  • VAT return(s) for your business if your company is VAT registered.

HMRC specifies a number of different deadline dates for each of these returns. A list of key dates for the main tax return categories is given below.

Tax Return filing and payment deadlines

Self Assessment Tax Return:

The end of the tax year is 5 April. The start of each new tax year is 6 April. You will need to notify HMRC that you need to complete a self-assessment tax return for the previous tax year’s income.

Table 1

Employer related filing and payment deadlines

 Employer PAYE submissions in real time became effective from 6 April 2013. Employers now report their payroll information online directly to HMRC by submitting Full Payment Submissions (FPS) and Employer Payment Summaries (EPS).

table 2

Company Tax Return filing and payment deadlines

Corporation Tax is payable by all active profit making companies. The amount owed must be paid nine months and a day after the end of the company’s accounting period end date. This means that the actual deadline dates will vary from business to business.

box 3

 VAT Return filing and payment deadlines

There are no fixed dates in the year for paying VAT.  However, depending on the type of business and the VAT options you choose you could be filing and paying monthly, quarterly or annually.

box 4

Intouch Tax Returns Service

At Intouch Accounting we make your life easier, we offer tax return administration as a standard part of our comprehensive Monthly Service package (£98 + VAT per month). This includes filing all HMRC and Companies House tax returns, including your personal self-assessment tax return. Contact us to find out more about our services.

 

This blog has been prepared by Intouch Accounting. While we have made every attempt to ensure that the information contained in this blog has been obtained from reliable sources, Intouch is not responsible for any errors or omissions, or for the results obtained from the use of this information. This blog should not be used as a substitute for consultation with professional accounting advisers. If you have any specific queries, please contact Intouch Accounting.

New contractors’ guide to VAT

New contractors’ guide to VAT

One area that new Limited Company contractors need to think about from the start is the on-going tax liabilities of their company. Getting it wrong can potentially result in hefty financial penalties or worse, so it’s advisable to consult an experienced contractor accountant  to get the best advice for your circumstances. One type of tax which will be relevant to most Limited Company contractors is Value Added Tax (VAT).

 

VAT – what it is and where it applies

VAT is charged on the final consumption of a variety of HMRC specified goods and services and is applied to every stage of production and distribution. Most business-related goods and services fall under VAT so the majority of Limited Company contractors are likely to be subject to VAT charges.

 

How VAT is calculated

At its simplest a contractor VAT bill is the balance of the VAT you have charged to clients, minus the VAT you have claimed back on allowable items you purchased. If you have paid out more in VAT than you have charged, HMRC will refund the difference. The standard UK VAT rate is currently 20%. However, there are other rates which could apply depending on the type of goods or services being sold and where (in the world) they’re consumed.

 

VAT Accounting Schemes

HMRC offers schemes designed to help contractors in terms of how VAT is calculated and administered.

There are two options for accounting for VAT available to companies with a taxable turnover of up to £1.35million these are:

  • Cash Accounting – with this option the company only accounts for VAT when their invoice is actually paid. This can be helpful for the cashflow of the business. (Under this scheme you can also only claim back VAT on purchases once you’ve actually paid the invoice.)
  • Annual Accounting – with this option the company only submits one VAT Return a year. Monthly payments of the VAT bill amount are made to HMRC throughout the year. This too can be helpful for cashflow.

 

The Flat Rate Scheme

HMRC offers the Flat Rate Scheme which is designed to make VAT administration easier for many contractors. Rather than claiming VAT on each invoice you pay a percentage of your company turnover. For example 14.5% for an IT consultancy. There are main advantage to this scheme you can continue to charge clients 20% while you give a smaller percentage to HMRC. One downside is that you cannot claim the VAT back on your own business purchases unless they are capital purchases over £2000, which could be an issue for some business types. Another is that if you make a lot of zero rated or VAT exempt sales you’ll still be charged VAT on those sales, even though you’re not charging the client.

 

When you should register for VAT

VAT registration is mandatory for companies who have made taxable sales in the last 12 months above the current VAT registration threshold amount. For the 2013/14 tax year this is £79,000. HMRC usually increases the threshold by around £1,000 each year so for the 2014/15 tax year the threshold is likely to be higher. Even if your sales are unlikely to reach this level you can still voluntarily register your company for VAT. Many contractors choose to do this as it can offer several advantages as claiming back VAT on invoices they receive. If you decide not to register but you believe you’ll exceed the threshold in the near future (if you win a huge contract for example) you should register as soon as possible to remain within HMRC rules.

 

How to register for VAT

You need to apply directly to HMRC to register your company for VAT. This can be done online using their website or by post. You can do this yourself or your Intouch accountant can do this for you on your behalf.

 

Quarterly VAT returns at Intouch

At Intouch we offer Quarterly VAT return administration as a standard part of our comprehensive monthly service package (£98 + VAT per month). Contact us to find out more about our services and how we can help take the stress out of running your business.

 

This blog has been prepared by Intouch Accounting. While we have made every attempt to ensure that the information contained in this blog has been obtained from reliable sources, Intouch is not responsible for any errors or omissions, or for the results obtained from the use of this information. This blog should not be used as a substitute for consultation with professional accounting advisers. If you have any specific queries, please contact Intouch Accounting.

VAT – Could you be paying too much? Flat Rate VAT?

The benefits and burdens for contractors of the flat rate VAT scheme

Paul Gough, Managing Director of Intouch Accounting, the personal online accounting adviser for contractors and freelancers, looks at the pros and cons of adopting a flat rate scheme, and explains more about how the scheme could affect contractors’ take home pay.

The flat rate scheme, or FRS, was introduced by HM Revenue and Customs (HMRC) in 2002, as a way to simplify accounting for small businesses. In short, in order to calculate the amount of VAT paid to HMRC, the income of a business, including any output tax, is applied to a flat rate percentage. With a few exceptions, input VAT on purchases is ignored.

And the result: a very simple VAT accounting process, making completion of the VAT return easy to do, and easy to verify.

 

Who uses the flat rate scheme and why?

The scheme is open to businesses whose annual taxable turnover or estimated turnover is less than £150,000. Once you’ve joined the scheme you can stay until your turnover exceeds £230,000 including VAT.

It was very quickly established that, for many contractors (those who fit within the threshold), accounting for VAT on the flat rate scheme actually produced a lower VAT liability than when VAT was accounted for on the normal basis. And so, an opportunity to “profit” from the simplified scheme quickly emerged and the scheme became the norm – with most contractors adopting it as their chosen method for accounting for VAT.

But, as with many aspects of accounting and tax, a standard solution is not always the right solution.

Too often advisers adopt a standardised approach to dealing with contractors and fail to consider, on an individual case basis, whether or not the standard solution is in fact appropriate. Providers of accounting software solutions may not raise this issue with you at all.

 

1. Are you exporting goods or receiving rental or investment income?

Under the FRS, with a few exceptions all of your income is included in the calculation. This means that income that may not be normally subject to VAT output is still included in the flat rate calculation.

A good example is if you work abroad for a non-business customer (such as an individual) and zero- rate your services. In this case, there is no VAT. However, under the FRS you would still calculate the percentage on that zero rated income and pay that to HMRC.

But it’s worth noting that when you provide your services to a “commercial entity” it is the place of supply that is important. The place of supply is where the customer belongs, and if that is outside of the UK then this work is outside the scope of VAT and is not included.

Similarly, other zero-rated sales and exempt sales are included. So, make sure you watch out where you export goods, or receive rental and some investment income; you could end up paying more VAT on the flat rate scheme than under the standard scheme.

And, if you sell capital assets and you previously reclaimed VAT, then you must account for the VAT on sales on the standard basis even though you use the flat rate scheme.

 

2. Do you know if the right rate of VAT is being applied to you?

The second danger is that, too often, the percentage selected as the flat rate is a default rate, without thought to the nature of the services being supplied. This is often the fault of the accounting services provider who packages a service together, without applying thought to the individual circumstances of a contractor, and the work undertaken. With the flat rate varying, sometimes the standard flat rate applied is not the right rate, leading to a higher level of VAT liability.

We have seen flat rates as low as 10.5%, when the “norm” applied to contractors is 14.5%. The difference could amount to thousands every year.

 

3. Are you sure that VAT is being recovered when it should be?

The third danger is that input VAT is not recovered when it could be. Where contractors purchase capital assets and the cost exceeds £2,000 (including VAT), the input tax can still be recovered and deducted from the flat rate calculation. Attention to the detail is important. This can often be overlooked because such purchases don’t happen very often.

And, if you buy items and sell them on – which does sometimes happen when you incur costs for your client and recharge them – the VAT on the costs you incur cannot be reclaimed.

 

4. Do you incur unusually high volumes of input VAT on purchases?

The final danger is that if you incur higher than usual volumes of input VAT, by hiring other contractors (who are VAT registered) as sub-contractors for example, then this will significantly increase your VAT suffered. Under the FRS you will be unable to reclaim this back from the VAT man, as it does not qualify for inclusion. The “lost” VAT element will increase your costs and reduce your profitability.

 

Are there any benefits to using the flat rate scheme?

While we have mentioned some of the disadvantages to using this system for VAT, the good news is that there are also significant advantages to using the flat rate scheme:

 

1. Less VAT payable in your first year

If you’re in the first year of VAT registration, you get a one per cent reduction in your flat rate percentage – and this applies until the day before your first anniversary of being VAT registered.

 

2. More time to spend on your business

Because you don’t need to record VAT suffered on every purchase (as with standard VAT accounting), you’ll incur lower administration and processing costs – giving you more time to focus on your business, rather than on the onerous VAT administration process.

 

3. Fewer risks and less chance of making a mistake

Also, with fewer rules, there’s less chance of making mistakes on your VAT return using the scheme, reducing the risk of accidentally claiming input VAT which you’re not entitled to – and, therefore, reducing the risk of an investigation by HMRC.

 

4. You could even profit from the scheme

With FRS you pay a percentage of turnover whereas, with standard VAT accounting, you pay VAT on the difference between sales and purchases. So, while you continue to charge clients the standard rate of 20% VAT, you don’t have to give that percentage to the VAT man. For IT contractors, for example, the norm is 14.5% VAT, but the FRS rate differs from sector to sector.

 

But, make sure you calculate your flat rate turnover correctly and avoid paying a penalty to HMRC

 If you accidentally leave items out and end up paying too little VAT, you could incur a penalty from HMRC.

So, make sure you work out your flat rate turnover correctly – or speak to a specialist personal online accounting adviser who will help you to avoid any tricky situations with HMRC.

 

This blog has been prepared by Intouch Accounting. While we have made every attempt to ensure that the information contained in this blog has been obtained from reliable sources, Intouch is not responsible for any errors or omissions, or for the results obtained from the use of this information. This blog should not be used as a substitute for consultation with professional accounting advisers. If you have any specific queries, please contact Intouch Accounting.