Flat rate VAT was introduced in 2002. It works on the basis of users no longer being required to account in detail for their output VAT (VAT on sales) or their input VAT (on expenses). Instead they continue to charge the normal rate of VAT on their sales and then account to Customs and Excise for VAT on the basis of paying over to Customs and Excise a flat rate percentage of their VAT inclusive turnover (including non-taxable turnover). The aim of the scheme is to simplify VAT administration for small businesses.
When the scheme was first introduced the applicable flat rate for IT consultants, was 14.5%, which meant, in effect, that for most IT consultants the scheme was unattractive. However changes were made to the scheme at the end of 2003 (effective 1 January 2004) when the flat rates were amended - generally by a reduction of around 1% and a further 1% reduction was introduced for all businesses in the first year of VAT registration.
The flat rate for IT consultants actually fell by 1.5% to 13%. The rate for management consultants and accountants is also 13%. Engineers could use the 12.5% rate applicable to civil and structural engineers or could argue that they fall into the category of "business services not listed elsewhere" and use that rate of 11%.
These levels of rate, plus the additional 1% reduction for the first year of registration makes the scheme much more attractive. To be eligible to use the scheme your annual taxable turnover, before VAT, must not exceed £150,000 pa with your total annual turnover (including exempt and non-taxable income) not exceeding £187,500 before VAT.
For details of applying flat rate VAT, how the flat rate works, using the flat rate scheme, accounting for flat rate vat, vat on mileage claims, recharged expenses and working overseas.