If you are operating your own contractor company and your income is less than £150K, generally it’s a no brainier not to join the vat flat rate scheme.
Briefly, you charge 20% VAT on your fees and expenses to your customer and for ignoring all vat on purchases the VAT flat rate scheme allows you to charge a flat percentage against your total gross sales invoice value and pay this lower rate over to HMRC.
The flat rate percentage is selected based on your industry category, for example, Management consultancy is 14% and IT / Software consultancy is 14.5%.
A worked example;
Tom, a management consultant, invoices £70,000 during the year.
He becomes vat registered and joins the flat rate scheme
Tom invoices £70,000 + vat of £14,000 = Gross invoice value of £84,000.
He pays over to HMRC £11,760*. Therefore retaining £2,240 as additional income for the company.
(Gross invoice value £84,000 x 14% = £11,760 vat payable).
The benefits don’t stop there…
- In the first year of being VAT registered, HMRC allow a further 1% deduction from the industry rate allowing you a greater saving and increased income for the company.
- For one off purchases of capital equipment such as a computer, if the total cost including vat is in excess of £2,000, HMRC will allow you to claim the VAT back on this item. Simply claim this as input vat on your next return.
For HMRC industry rates please follow the link
For more information on this article or to join the VAT flat rate scheme please contact Peter Edwards on 0161 4776789