Flat VAT Scheme for IT contractors: the basics

A potential benefit of being VAT registered is the "VAT Flat Rate Scheme".

The flat rate scheme was introduced by HMRC in 2002 and is a simplified method of calculating VAT enabling you to save time and often, money. Limited companies turning over less than £150,000 excluding VAT are eligible for the scheme. You can voluntarily leave the flat rate scheme at any time.

You are given a fixed percentage for your particular type of business and then you apply this percentage to your gross sales. You cannot reclaim any VAT on this scheme, but broadly speaking if you do not claim much VAT back anyway you will be better off using the Flat Rate scheme. It saves small businesses time since you do not need to record all the details of the invoices issued or purchase invoices received to calculate the amount of VAT payable to HMRC.

To give an example, say your VAT flat rate to use is 13% (all the percentages are here).

So, when raising a sales invoice, you still charge VAT at 20%, so a sale of £100 would look like:

Net Sale £100
VAT £120
Gross sale £120

When declaring the VAT payment to make to the VAT office you would use the flat rate percentage, so 13% on the gross sale (£120) making £15.60 payable, instead of the £20 – you get to pocket the difference. Be aware though that unlike the ordinary VAT you cannot claim any VAT on most purchases (except larger capital asset purchases over 2,000 pounds), so before signing up with the Flat Rate, make sure your accountant checks to see whether you would actually be better off.