VAT for IT contractors
Registering VAT for IT contractors
VAT registration helps many IT contractors maximise their take home pay.
If your annual pre-tax turnover is less than £81,000, VAT registration is optional. If it exceeds that figure in any 12-month period, it’ll be compulsory.
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VAT registration can work to your advantage in two ways. The first is via standard VAT or cash accounting. Under these schemes, you add VAT to your invoices and pay that money to HMRC every quarter. You also claim back all the VAT you pay on your business expenses.
Under standard accounting, the VAT you pay and the VAT you claim back are based on the dates on the relevant invoices. With cash accounting, your liabilities and claimable amounts are based on the date you make or receive payments.
When the VAT you’ve billed to (or received from) clients is higher than the amount you’ve paid out (or been billed), you pay HMRC the difference. If the reverse is true, HMRC repays you.
Flat rate VAT for IT contractors
The second option is FRS, the VAT flat rate scheme. Again, you charge VAT on your invoices, however, you can’t claim VAT back on outgoings unless they’re for capital purchases where the invoice total is £2,000 or more, including VAT.
Instead, you pay HMRC VAT at a lower rate than that charged (currently 20%) – and keep the rest. The rate for IT contractors is 14.5%.
Let’s say you invoice your client £4,000 per month. At the end of each VAT quarter, your gross turnover will be £14,400 (£12,000 fees plus £2,400 in VAT at 20%).
Of this £14,400, you pay HMRC 14.5%, That’s £2,088.
The £312 difference (£2,400 you’ve received less £2,088 paid to HMRC) is yours to keep.
You can apply for FRS if your annual turnover is less than £150,000 ex VAT. If your VAT inclusive turnover then exceeds £230,000 in a financial year, you’ll no longer qualify.