The Tax Loophole Every IT Contractor in the UK Should Know About
IT consultants in the UK can increase their income by around 3% by taking advantage of the Flat Rate Scheme for VAT. This scheme is designed to simplify the VAT calculations for small businesses, but for IT contractors it also offers a significant boost to income.
How does it work?
Put simply, the Flat Rate Scheme allows you to collect more VAT than you pay to HM Revenue & Customs.
For example, say you charge your client £10,000 for IT services. Under this scheme you also add £1,750 VAT giving a gross income of £11,750. You then pay 13% of this gross amount (ie. £1,527.50) to HM Revenue & Customs. So by using this scheme your profit is £222.50.
Even better, during the first year the ‘flat rate’ is reduced to 12% - in this case you only have to pay £1,410 to HMRC, resulting in a profit of £340.
If you aren’t currently registered for VAT, you may worry that billing an additional 17.5% will reduce demand for your services. But as an IT contractor your clients are more than likely registered for VAT and so they can reclaim any VAT they pay you.
Who should not use this scheme?
The majority of IT contractors in the UK could benefit from this scheme. However, if your expenses are more than 12.7% of your income you would probably be better off under the normal VAT rules (which allow you to claim back the VAT you’ve paid on expenses).
You will also be unable to benefit from this scheme if you cannot charge your clients VAT - for example, if they are outside the UK.
Finally, you cannot belong to this scheme if your annual income is more than £150,000 excluding VAT.
How do I apply for the Flat Rate Scheme?
You can apply for the scheme by post, email or phone - see Section 5.2 of VAT Notice 733 for details. If you are not currently registered for VAT you will also need to apply to be registered for VAT.
Once HM Revenue & Customs confirms that you are registered under this scheme, you must submit a VAT100 form and a VAT payment every three months. This can be done by post or online. The form looks like this:
At first glance it looks confusing, but for IT contractors it’s usually straightforward. Enter your VAT-inclusive turnover in Box 6 (eg. £11,750) and then enter 13% of this value (eg. £1,527.50) in Box 1, Box 3 and Box 5. Enter zero for the other boxes.
Accounting Software
If you use accounting software it’s important to check that it supports the Flat Rate Scheme. Without built-in support for the scheme, simple procedures can become quite complicated.
If you are currently looking for accounting software, you may want to consider Solar Accounts, which supports the Flat Rate Scheme. Click here for details on how the scheme is supported in Solar Accounts.
More Information
VAT Notice 733 describes the Flat Rate Scheme in detail. For more information talk to your accountant or phone the HM Revenue & Customs advice line on: 0845 010 9000.
November 27th, 2008 at 10:10 am (GMT)
Nice post, Flat rate scheme is the Best solution for the Small businesses. Flat rate scheme is create easy to calculation of VAT for Small businesses.