Not all contractors know when starting out, that you can actually earn extra money from using the VAT Flat Rate Scheme. It works in the way that you charge your customer the standard rate of VAT at 20 percent, but you are only required to pay HMRC a lower, flat rate; 14.5 percent for IT Contractors, as an example.
Register for flat rate vat
Until your income reaches £83,000 (VAT registration threshold 16/17), you can choose to remain outside the VAT system. However, many contractors opt to register in advance as there is a financial benefit in doing so.
The Flat Rate VAT Scheme is only available if your turnover is under £150,000 per year.
However, for most contractrors, and indeed locums and small business owners, this thereshold is suitable. This is why it works so well.
When you are VAT registered you have to ensure your filing is up-to-date and you pay across your VAT on time each quarter. Using cloud-based software eases this process by saving you time.
Calculating Flat Rate VAT
Calculating Flat Rate VAT is straightforward, although it does require monitoring, and a good system to record everything in a suitable format for HMRC.
On all invoices to your customers you charge 20 percent. For example, if you raise an invoice for £1,000, the total invoice is £1,200, with £200 being the additional VAT.
At the end of the quarter, summarise the gross value of all invoices and apply the HMRC Flat Rate VAT percentage, which is set according to your profession.
- For IT contractors, the Flat Rate percentage is 14.5%.
- For Management Consultants it is 14%.
- For other types of contracting or small businsesses, it is important to consult the HMRC list.
To use IT contractors as an example, a gross invoice of £1,200 X 14.5% means paying HMRC VAT of £174, leaving £26 in your pocket, which is the difference between the VAT you charged your customer and the VAT you paid across.
how much EXTRA can you EARN ON THE FLAT RATE VAT SCHEME?
Here is an example using a £350 per day net contract value, for a 45 week year.
In your first year on the Flat Rate Scheme you will also receive a 1% discount from your set-rate. This means you get to keep a little more.
Contact us so we can prepare a VAT estimate based on your current contract.
Contractors, freelancers and small business owners talk to AJN Accountants to help them save tax and time.
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