Contractors registered for VAT can choose to use either the standard rate VAT or register for the VAT Flat Rate Scheme.
In this article, Gorilla Accounting’s team explain the features of both schemes, how they differ from each other, and what you need to take into account to choose the better option for your contracting business, alongside the advice given by your accountant.
The original aim of the VAT Flat Rate Scheme was to simplify the process of charging and reclaiming VAT for smaller businesses. It allows eligible businesses to calculate the VAT liability by applying a fixed rate percentage to their gross turnover.
To be eligible for the Flat Rate VAT Scheme, you should expect your VAT taxable turnover to not exceed £150,000 in the next 12 months. You must leave the scheme if your VAT inclusive turnover in the last 12 months was more than £230,000 or if you expect it to be in the next 12 months.
Some of the differences with the VAT Flat Rate Scheme compared to using standard rate VAT are as follows:
You may be classed as a Limited Cost Trader if your business expenditure on goods is either:
If you are classed as a Limited Cost Trader, then the fixed rate percentage to use will be 16.5% (15.5% in the first year of VAT registration).
To calculate the VAT liability using the standard rate VAT, you work out the difference between the input VAT and the output VAT during a quarter.
Output VAT is the amount of VAT that you charge on your sales. Input VAT is the amount of VAT that your suppliers charge you.
Every quarter, you should add up all of the output VAT you have charged and then subtract the total amount of input VAT paid on your purchases. This then leaves you with either a balance that needs to be paid or an amount that you will be refunded by HMRC.
The Flat Rate Scheme does have benefits but whether the scheme is best for you can depend on the industry that you work in, the level of company turnover, the amount you spend on goods used by the business and the amount of VAT that could be reclaimed using the standard rate scheme. It is worthwhile comparing what the business would pay using the Flat-Rate Scheme against using standard rate VAT.
If you would like to find out whether it would be best for your contracting business to be on the VAT Flat Rate scheme, get in touch with us. We can also help you determine if you are a Limited Cost Trader at the same time. Call us today on 0330 024 0406 or email firstname.lastname@example.org.
Download our free contractors guide that’s packed with tips and advice for running a limited company. It details rules and regulations around running your own business as a contractor or freelancer.
We would love to update you on exclusive offers, handy guides and the latest Gorilla Accounting info.
T: 0330 024 0406
Gorilla Accounting Head Office
Unit B Lostock Office Park
Monday to Friday
8am - 6pm