VAT for Directors: Registering & Schemes

Value Added Tax (VAT) is often seen as a headache, but for some IT contractors and consultants, it can actually generate profit.

The Thresholds

• Compulsory Registration: If your "taxable turnover" exceeds £90,000 in a rolling 12-month period.
• Voluntary Registration: You can register even if you earn £1.

Why Register Voluntarily?

1. Credibility: It makes you look like a larger, established business.
2. Reclaiming VAT: If you buy expensive laptops/equipment, you can reclaim the 20% VAT on costs.
3. Flat Rate Scheme Profit: (See below).

The Flat Rate Scheme (FRS)

Designed to simplify VAT for small businesses (turnover under £150k).

• Standard: You charge 20% output tax, reclaim 20% input tax. Pay the difference to HMRC.
• Flat Rate: You charge 20% to the client. You pay a lower fixed % to HMRC. You reclaim nothing on expenses (usually).

The "Profit" Trick

• Sector: "Computer Consultant".
• FRS Rate: 14.5% (You get a 1% discount in Year 1 = 13.5%).
• Mechanism:
  • Invoice Client: £1,000 + £200 VAT = £1,200.
  • Pay HMRC (14.5% of gross): £1,200 * 14.5% = £174.
  • Difference: You keep £26.

On £100,000 turnover, this "VAT Surplus" is £2,600 of pure extra profit.

• Note: The surplus counts as taxable income for Corporation Tax.

The "Limited Cost Trader" Trap

If you spend less than 2% of turnover on goods (software/services don't count), you are a "Limited Cost Trader".

• Rate: 16.5%.
• Result: The profit virtually disappears (16.5% of gross is almost exactly 20% of net).
• Most pure IT contractors fall into this trap now.

Making Tax Digital (MTD)

You cannot use a spreadsheet and type figures into the HMRC website anymore. You must use MTD-compatible software (Xero, FreeAgent, QuickBooks) to file quarterly returns.

Summary

• Register if you hit £90k.
• Consider FRS only if you buy goods (to avoid Limited Cost Trader status).
• Software is mandatory.

Disclaimer: VAT rules are rigid. Late filing penalties are automated.