Quick Guide Contractor Limited Company VAT

In a Nutshell

Money for nothing

In a Sentence

As unbelievable as this may seem, HMRC actually give contractor limited companies money for doing nothing - really.

VAT Flat Rate Scheme

There's something called ‘The Flat Rate Scheme (FRS)' which contractors can register for, in order to make a bit on the side - legally, and with the blessing of HMRC. Many, if not most, contractors running a limited company take advantage.

It originated from the concept of reducing paperwork and administration for the staff at HMRC. We didn't say they did it out of kindness for contractor limited companies!

Workings

The scheme makes it easier for limited companies to file a VAT return, if their turnover is less than £150,000. Instead of working out the difference between VAT charged and VAT paid, contractor limited companies just pay a flat rate.

The rate varies, and your contractor accountant will tell you exactly what rate applies to you, and ranges between 8% and 14.5%. If you're providing a consultancy service it's likely the rate will be 13.5/14.5 %.

Simple Example

If you invoice for a job for £2,000, you add 20% VAT to the invoice amount. However, you only pay HMRC, say, 14.5%. You pocket the balance!

There is a downside; you can't reclaim VAT on purchases unless it's a capital item over a defined limit. In most cases the limited company will make a profit.

Don't get too hung-up by the precise calculations; your contractor accountant will do all that for you. All you need to know is that you get money for nothing.