Contractors' Questions: Can I simplify VAT?

Contractor’s Question: I have only just set up a limited company and am keen to keep administration to a minimum so I can focus on running my IT business. Regarding VAT to that end, would I find accounting for it easier if I used the Flat Rate Scheme, which I’ve already calculated could possibly save me money?

Expert’s Answer: The Flat Rate Scheme (FRS) will not necessarily simplify accounting for VAT in your year-end accounts, but it could indeed save you money and will make VAT easier to calculate when paying HM Revenue & Customs.

To explain, when drawing up your year-end accounts, it is important to know if the FRS is profitable for your business and not costing you more than the standard VAT method. You should account for VAT on sales and purchases at the normal VAT rates and recognise a profit or loss on VAT arising from the flat rate, which is subject to tax. Any simplicity in drawing up your VAT returns may therefore be lost when preparing your year-end accounts. As a result, the FRS’s appeal might be saving money rather being simpler to operate.

Perhaps you should consider joining the VAT annual accounting scheme. Under this scheme, the business has to submit only one VAT return each year, but must pay an amount of VAT on account each month. This scheme, which provides you with two months at the end of the year to prepare and file your VAT return, is open to you if you are operating either the standard or flat rate scheme.

The expert was Jon Dawson, partner at Top 20 chartered accountancy firm Kingston Smith LLP.