As the UK starts to feel the effects of the VAT threshold rising from 17.5 per cent to 20 per cent on the 4^th January 2011, there are some positives to take from it for limited company contractors.

From an admin point of view, the impact of this has been fairly simple as contractors have had to amend their invoices accordingly.

The good news is that this change in flat rate VAT could leave limited company contractors and micro business owners better off in the New Year.

The rate changes vary depending on their sector or type of business. For example, for IT contractors, this changes from 13 per cent to 14.5 per cent.

You can see a table of all the rate changes on the HMRC website by clicking here.

The flat rate scheme was introduced to reduce the administrative burden imposed when operating VAT. Under the scheme a set percentage is applied to the turnover of the business as a one-off calculation instead of having to identify and record the VAT on each sale and purchase you make.

If you aren’t already registered for VAT you must submit a form VAT1 at the same time.

Using traditional VAT accounting, the VAT you pay to HMRC or claim back from them is the difference between the VAT you charge your customers and the VAT you pay on your purchases. Using the Flat Rate Scheme however, you pay VAT as a fixed percentage of your VAT inclusive turnover.

You can join the Flat Rate Scheme for VAT and so pay VAT as a flat rate percentage of your turnover if your estimated VAT taxable turnover – excluding VAT – in the next year will be £150,000 or less.

Your VAT taxable turnover is the total of everything that you sell during the year that is liable for VAT. It includes standard, reduced rate or zero rate sales or other supplies, however, it excludes the actual VAT that you charge as well as VAT exempt sales and sales of any capital assets.

Under the Flat Rate Scheme you generally don’t reclaim any of the VAT that you pay on purchases, although you may be able to claim back the VAT on capital assets worth more than £2,000.

Once you join the scheme you can stay in it until your total business income is more than £230,000.

Our guide to VAT gives a bit more information here, and if you are ClearSky client, or just want to pick our brains anyway, get in touch with us now.

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