A Guide to VAT and contracting

Many people contract via a limited company. Not so many are aware of the additional income that can be generated from using the VAT Flat Rate Scheme.

Normal VAT

Under the normal VAT scheme you charge your customers VAT at the standard rate (currently 20%). When completing your VAT Return you would deduct from this sales VAT amount the VAT incurred on your purchases. You pay the difference to HMRC.

The Flat Rate Scheme

The flat rate scheme is slightly different and this is how you can make some money. You still charge your customers VAT at 20% but rather than work out the VAT on your purchases you apply a flat rate for your industry.

For Guides, who are often selling their time, these 'flat rates' can often be advantageous.

You can still claim back VAT on assets (equipment such as computers), or a group of assets purchased at the same time, costing more than £2000 including VAT.

How much extra?

If we look at an IT contractor who would be using a flat rate percentage of 14.5%. We will also assume a 5 day working week and 48 week working year then the potential extra earnings are:-

Earnings of £200 per day - £1,248 per year

Earnings of £300 per day - £1,872 per year

Earnings of £400 per day - £2,496 per year

Earnings of £500 per day - £3,120 per year

Any pitfalls

The advantages of this scheme will be effectively eradicated from 1 April 2017 for most businesses. For more detailed info take a look here.

Obviously with anything in life it can't all be just good news. In this case the bad news isn't that bad though.

The 'income' you will have earned from the flat rate scheme will be subject to tax in the company so you will lose 20% of what you have made in tax.

Secondly you will also be required to complete a VAT Return every 3 months. It is however, a fairly simple process and something we can help with. It is also included with our Plus and Premium packages.


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