My research has revealed a record breaking increase in the number of new contractors / limited company formations, which supports the theory of a new entrepreneurial culture developing to partly replace the traditional employment culture, as a result of the economic crisis.

Many jobs are being shed by the civil service and local government, with quangos being particularly hit hard. The government have stated their expectation that the private sector will replace a lot of the jobs and functions hitherto carried out by the public sector.

According to the Management Consultancies Association which represents 70% of the industry in the UK, member organisations have already seen a significant fall in public sector work, with most expecting to drop further in the remaining part of the year.

An increasing number of consultants are setting themselves up with their own business to position themselves to take advantage of the new way of doing business in the UK. Their client organisations are increasingly looking to become more flexible, preferring to outsource and sub-contract rather than employ permanent staff, with all of the financial and legal risk that traditional employment involves.

An increasing number of agencies are in the marketplace to provide an important link between the client organisations and the contractors and consultants who can fill the required roles.

In my experience, the hourly rates achievable by independent contractors are nearly always significantly higher than what the consultant would be likely to expect if they were employed by the same business.

In nearly every case, it is best to form a limited company and take a small salary and high dividends to maximise take-home remuneration. It is now possible to set up a limited company in a matter of hours and set up a business bank account within a week. Also, with the advent of online VAT registration, it is now possible to register within a few weeks.

By registering for the VAT Flat Rate Scheme (FRS) and maximising claims from their company for allowable business expenses, consultants can optimise their take home remuneration by operating through their own limited company.

All good accountants will be able to explain in simple terms the benefits and the ease of working through your own company. For more information visit our website or please don’t hesitate to call 0800 8 40 40 14 or email me.

Graeme Bennett is a Director at Forbes Young Accountants
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For many contractors, the Flat Rate VAT (FRV) Scheme provides a simple and often lucrative alternative to accounting for VAT using standard VAT accounting principles.

Although the reversion of the VAT rate to 17.5% from 1st January 2010 was largely anticipated, many contractor accountants are now advising their clients that not all Flat Rate percentages have been reset to pre-December 2008 levels.

It is believed that some percentages have changed now that HMRC have had the opportunity to review their position, and study more recent statistical data about the level of Input VAT being re-claimed under the standard method of accounting.

The good news for IT contractors is that the percentage rates for Computer & IT and Management Consultancy have reverted to the original FRS percentages. However, contractors working in other sectors should check the revised rates before completing any VAT returns that cover periods from 1st January 2010 onwards.

The detail was announced in PBRN33, but for ease of reference the attached table shows the rates up to 30/11/08, from 01/12/08 to 31/12/09, and from 01/01/10.

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It is a legal requirement that if you are trading as a business you have to register for VAT as soon as your turnover exceeds £68,000 (from 2009 – the threshold is periodically reviewed). This is based on turnover in any given trading year, not your profit; as soon as you have raised invoices in excess of the threshold you must register.

You can register before you reach this level or even if you never reach it. The only requirement for registration is that you are actually trading (or are about to). As long as you can produce invoices or a signed contract to deliver work, you will qualify.

You must of course be registered for VAT before you can apply to move on to the Flat Rate scheme.

The advantage of registering is that you can then reclaim any VAT you have spent out in the course of your business. So the VAT element of any equipment you have bought or expenses you have incurred can be recovered. In practice you offset it against the VAT you have charged to your customers and remit the balance to HMRC.

Remember that once you have registered for VAT you have to charge it at the prevailing rate on any invoices you raise from that point on. If your clients are VAT registered themselves this is not an issue, since they can recover VAT the same way that you can. However, if they are not, or are trading in a VAT-exempt industry you might need to think about the impact on them of you raising your prices by 17.5%.

You can apply to de-register at any point provided you can convince HMRC that you are going to be trading under the threshold for the foreseeable future, and you must de-register if you meet some other criteria, for example if you cease trading in VAT-liable supplies.

Finally, if you are trading through an umbrella company, you do not need to worry about VAT, since they will be the registered company and will manage the VAT element of your invoices for you.

© 2009 All rights reserved. Reproduction in whole or in part without permission is prohibited.

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In 2002, HMRC introduced the Flat Rate Scheme (FRS) for small businesses. Its primary aim is to greatly simplify the calculation of VAT by removing the need to account for VAT on all the items that pass through your business and so improve both accuracy and compliance.

FRS allows you to charge VAT to your clients at the prevailing rate but pay a lump sum to HMRC at a lower flat rate. There are different rates for various types of business, but for most IT contractors and similar, the prevailing rates at the time of writing are 15% and 11.5% respectively. (Note that these will change in January 2010 when VAT returns to 17.5%. The repayment rate was previously 13%, but the Chancellor has hinted he may revise this rate, presumably to something less advantageous).

The advantages are obvious. Calculation of VAT due is simply a straight percentage of your gross turnover. Since you are repaying less that you are charging, you make a small profit. This is liable to Corporation Tax, of course, so is a little less than you may think, but every little helps. If, however, you have a large number of purchases in your line of business, you may lose out overall. If you buy a single item for more than £2000, incidentally, you can reclaim the total amount of VAT paid out for that item separately to your FRS calculation.

You can join the scheme if your annual taxable turnover excluding VAT does not exceed £150,000 pa and your total projected turnover for the next 12 months does not exceed £187,000 (figures correct at the time of writing but may change).  You can leave the scheme voluntarily at any time, or if your annual turnover goes over £225,000 pa.

One thing to be careful of is when the VAT rates change. You must always apply the correct pair of percentages at the tax point of the invoice. You cannot charge at the old rate and pay back at the new one or vice versa, you must account for the correct amounts either side of the date of the change.

Finally there is an incentive for new joiners. The flat rate is further reduced by 1% for the first year

The simplest way to join the scheme is to phone the VAT Helpline at HMRC on 0845 01 9000 and they will put the wheels in motion, or you can download an application form from HMRC.

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Value Added Tax is a tax levied on the supply of goods and services. It is applied at each stage of the supply chain. There are several rates, which are set annually in the budget, ranging from the main headline rate (15% at the time of writing but returning to 17.5% in January 2010) down to zero. Some goods, such as food and children’s clothing, are exempt.

You are obliged to register for VAT if your gross turnover from all sources exceeds a set amount in a trading year (at the time of writing, this is £68,000). Even if you don’t meet that threshold, it is usually advantageous for a contractor to register for VAT since it allows you to reclaim the VAT you will have paid out on your own company purchases.

Once registered you are obliged to charge VAT on all invoices you raise. At set intervals, usually quarterly, you submit a VAT100 form to HMRC declaring what VAT you have charged out to clients (your output VAT) and what you have paid yourself on purchases (your input VAT). If output exceeds input you pay that amount, if input exceeds output HMRC will reimburse the balance.

It is very important to remember that VAT is not your company’s money and does not form part of your gross income. In effect, you are collecting it for HMRC and holding it until it is due to be paid over. Non-payment of VAT is serious and penalties accordingly severe

Registration for VAT can take a while to come though. You cannot charge VAT until you have your registration number, but you can mark your invoices “VAT Registration applied for”. When you eventually get your number, you can then invoice your clients for the VAT due on those previous invoices.

To be legal, a VAT invoice must contain your registration number and the Tax Point, which is the point in time at which the VAT is applied. Most contractors will be supplying a continuing service, so the Tax Point is the date of the invoice, but if you are selling goods, it is the date the goods are delivered. The Tax Point is important, primarily when the prevailing rate of VAT changes for any reason. If your invoicing period crosses the date of a change in VAT, you should ensure the correct rate is applied; the easy way is to raise two invoices using the before and after rates.

Finally, HMRC operate a Flat Rate VAT scheme, which is useful for many small contractors. The scheme has some interesting side effects and is discussed separately

© 2009 All rights reserved. Reproduction in whole or in part without permission is prohibited.

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