VAT

The current compulsory VAT registration limit is £81,000. This level of income is often above that expected by many contractors or freelancers. However most contractors or freelancers volunteer for VAT registration using the flat rate scheme (FRS) regardless of whether their turnover is above the VAT registration limit.

Once registered for the FRS the company charges VAT on the invoice at 20% (e.g. £1,000 net plus VAT of £200 giving a total receipt of £1,200) but pays VAT every quarter back to H.M. Revenue and Customs at its FRS percentage (e.g. 14.5% X £1,200 meaning only £174.00 is repaid to H.M. Revenue and Customs). A “gain” is therefore made by the company when using the FRS.

The downside is that the company may not reclaim any input VAT, but this is normally insignificant for a freelancer or a contractor.

There is an exception when the company purchases capital items in excess of £2,000 (inclusive of VAT) in one transaction. In that situation the input VAT may be reclaimed.

Below is a table of FRS percentages relevant to various professions (these rates apply from 4 January 2011):

Type Rate
Business services not listed elsewhere 12%
Architect, civil and structural engineer or surveyor 14.5%
Computer and IT consultancy or data processing 14.5%
Management consultancy 14%