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|
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.