Question:

I am an IT contractor operating from a Limited Company. My day rate is currently £300 and I am not currently VAT registered but should I be? Some of my friends are on the Flat Rate Scheme, what is this?

Answer:

The current VAT registration threshold is £83,000 (updated for the 16-17 tax year) and the turnover is assessed on a 12 month rolling basis. As soon as your rolling 12 months turnover looks like it is going to go above £83,000 you will usually need to register for VAT.

At a day rate of £300 your annualised turnover will be roughly £70,000 so you are below the VAT registration threshold , however you might benefit from registering for VAT anyway.

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UPDATE:

On 23rd November 2016 HMRC announced changes to the flat rate scheme from April 2017 with regards to a new flat rate scheme category, the ‘limited cost trader’ – we have written an article below which should be read in conjunction with this article:

VAT Flat Rate Scheme Changes 2017 – Limited Cost Traders

The first thing to consider is whether or not there is any commercial negative impact on you being VAT registered. If you are an IT contractor your clients will almost always be VAT registered businesses themselves and therefore will be able to claim back the VAT your charge them, therefore there does not appear to be any commercial reason not to register.

The next thing to consider is whether or not you have much in the way of costs that have VAT on them. A typical contractors costs will include:

  • Travel (no VAT)
  • Insurance (no VAT)
  • Accounting fees (often have VAT on them)
  • Salaries (no VAT)
  • Software (sometimes VAT)
  • Computer and office equipment (often have VAT on them)

If you voluntarily registered for VAT registration on the standard scheme then you would be able to claim back the VAT on your costs. Another option which many IT contractors do is to register for VAT on the Flat Rate Scheme.

Many people are not aware of this simplified VAT scheme but it is worth considering as not only can it involve less administration but you could actually profit out of the scheme.

You are eligible to join the FRS if your estimated VAT taxable turnover (excluding VAT) in the next year will be £150,000 or less.

We have written an article comparing the flat rate scheme with the standard scheme.

Under traditional VAT accounting, the VAT you pay to HMRC or claim back from them is the difference between the VAT you charge your customers and the VAT you pay on your purchases.

If you use the Flat Rate Scheme you pay VAT as a fixed percentage of your VAT inclusive turnover. The actual percentage you use depends on your type of business. The percentages can be found here. IT contractors usually use the “computer and IT consultancy or data processing” category.

The drawback, however, is that you are generally not allowed to claim VAT back on your costs (although you may be able to claim back the VAT on capital assets worth more than £2,000). You will need to look at your business cost base and work out the value of your purchases that contain VAT as this will dictate if the FRS will be beneficial for you or not. If you have substantial costs containing VAT it may not be right for you, but it is worth checking.

For typical IT contractors the Flat Rate Scheme is beneficial and we have outlined an example below which works through the calculations and compares the Flat Rate Scheme with the Standard Scheme.

Flat Rate Scheme IT Contractor

As you can see from this calculation breakdown , a significant gain can be made using the Flat Rate Scheme, as well as the benefit of it being simpler to administer. There is also an additional 1% discount on the Flat Rate percentage in the first 12 months.

One additional thing to bear in mind is that even if you register on the Flat Rate Scheme you can still claim back pre-registration input VAT on certain expenses.