The flat rate VAT scheme was designed by the government to simplify the VAT system, making it easier for contractors and freelancers to manage the collection and payment of VAT to the government. The basic premise is that you collect VAT on your invoices at a rate of 20%, and then pay it on to HM Revenue and Customs (HMRC) at a lower rate. The repayment rate varies depending on the industry in which you work, but IT contractors, for example, would pay just 14.5% to HMRC, excluding the first year when a 1% discount applies, making the rate 13.5%.

Contractors who are eligible for the flat rate VAT scheme could make some significant savings. See below for some examples of how much your additional income could be, based on a 45 week working year.

  • On a £200 per day contract, you could save £1,710 per year
  • On a £350 per day contract, you could save £2992.50 per year
  • On a £600 per day contract, you could save £5,130 per year

Because the Flat Rate Scheme (FRS) offers this level of savings, it is popular amongst contractors, interim managers, freelancers and other independent professionals. It is also recommended by most accountants for clients who don’t have many VAT chargeable transactions.

Important things to note about the Flat Rate VAT Scheme

  • Any business who expects their turnover before VAT to be more than £150,000 should not join the scheme.
  • If your annual turnover is likely to be more than £230,000 including VAT in subsequent years, then you must leave the scheme.
  • If you join the FRS, you will not be able to claim any VAT back on business purchases or expenses, but it is possible to claim VAT back on capital assets where the total bill has been more than £2,000. You can claim for a selection of items, which adds up to this sum, but they must all be purchased at the same time and shown on the same receipt in order to qualify to reclaim VAT in these circumstances.

As with normal VAT registration, you will need to complete a quarterly VAT return, which is only available for online submission. You will have to charge your customers and clients VAT at the prevailing rate (20% in 2014) and then simply pay a flat rate of VAT on your entire turnover when you complete your quarterly return, rather than accounting for the VAT on every individual invoice.

The percentage of VAT that you will need to pay on to HMRC will depend on your profession, please see the table below, but will be lower than the standard rate, meaning you can keep the difference as profit. For a limited company which specialises in IT(see below table for a full list of the standard rates depending on your profession), the figures work out like this:

Invoice amount to client

£5,000

VAT charged to your client

£1,000

Gross Amount invoiced

£6,000

Flat rate VAT 13.5% (this includes a first year discount of 1%)

13.5%

VAT to be paid to HMRC - 13.5% of £6,000

£810

VAT received from client

£1,000

Your profit

£190

Advantages of using the Flat Rate VAT Scheme

  • You could earn thousands of pounds in profit simply by using the FRS – the government provides the money as an incentive because you are effectively collecting the tax on their behalf.
  • The level of admin required to comply with the scheme is minimal as you only have to account for your quarterly turnover on your returns, rather than each individual transaction.
  • Businesses who register with the FRS will be given an additional 1% discount on repayments made to the government. This means that depending on the sector in which you trade, you could make even more significant savings on the amounts you pay for in the first year.

Disadvantages of using the Flat Rate VAT Scheme

  • If the nature of your business means that you buy in a lot of stock or have high rates of chargeable expenses, then you could lose out by not claiming the VAT back on these transactions.

To find out more about the Flat Rate VAT scheme and how it can benefit your company, please get in touch with a member of our new business team who will be happy to answer any of your questions on 01253 362062 or email newbusiness@nixonwilliams.com.

For more information on contracting you may find the following pages useful:

Flat Rate VAT Scheme Percentage Rates (2014)

Category of business

Appropriate percentage

Accountancy or book-keeping

14.5

Advertising

11

Agricultural services

11

Any other activity not listed elsewhere

12

Architect, civil and structural engineer or surveyor

14.5

Boarding or care of animals

12

Business services that are not listed elsewhere

12

Catering services including restaurants and takeaways

12.5

Computer and IT consultancy or data processing

14.5

Computer repair services

10.5

Dealing in waste or scrap

10.5

Entertainment or journalism

12.5

Estate agency or property management services

12

Farming or agriculture that is not listed elsewhere

6.5

Film, radio, television or video production

13

Financial services

13.5

Forestry or fishing

10.5

General building or construction services

9.5

Hairdressing or other beauty treatment services

13

Hiring or renting goods

9.5

Hotel or accommodation

10.5

Investigation or security

12

Labour-only building or construction services

14.5

Laundry or dry-cleaning services

12

Lawyer or legal services

14.5

Library, archive, museum or other cultural activity

9.5

Management consultancy

14

Manufacturing fabricated metal products

10.5

Manufacturing food

9

Manufacturing that is not listed elsewhere

9.5

Manufacturing yarn, textiles or clothing

9

Membership organisation

8

Mining or quarrying

10

Packaging

9

Photography

11

Post offices

5

Printing

8.5

Publishing

11

Pubs

6.5

Real estate activity not listed elsewhere

14

Repairing personal or household goods

10

Repairing vehicles

8.5

Retailing food, confectionary, tobacco, newspapers or children's clothing

4

Retailing pharmaceuticals, medical goods, cosmetics or toiletries

8

Retailing that is not listed elsewhere

7.5

Retailing vehicles or fuel

6.5

Secretarial services

13

Social work

11

Sport or recreation

8.5

Transport or storage, including couriers, freight, removals and taxis

10

Travel agency

10.5

Veterinary medicine

11

Wholesaling agricultural products

8

Wholesaling food

7.5

Wholesaling that is not listed elsewhere

8.5