VAT for your limited company
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Your PSC must register for VAT once taxable turnover passes £90,000 in any rolling 12 months (2026/27 threshold — raised from £85,000 in April 2024). Most contractors hit that around £450–£500/day at 220 days, so registration is near-universal at professional day rates. You can also register voluntarily below the threshold, which mainly helps if your clients are VAT-registered businesses (they reclaim it; you reclaim input VAT).
Flat-rate scheme (FRS)
Under FRS you pay HMRC a fixed percentage of turnover and keep the difference. Consultants and IT contractors pay 14.5%. You also get a 1% discount in the first year (13.5%). On a £120,000 turnover that's roughly £17,400 of VAT payable versus the £20,000 you charge — the margin funds itself.
The limited-cost-trader trap
Spend less than 2% of turnover on goods (excluding food, travel, capital items) and FRS forces you to 16.5% — which is usually worse than standard accounting for a services business. Software licences and subcontractors don't count as "goods". Most PSCs are limited-cost traders by definition, so run both calculations before choosing; a good accountant does this at setup (see the accountant guide).
Cash accounting
Pay VAT when clients actually pay you, not when you invoice — the standard cash-flow shield for contractors with 30-day terms. Combine with FRS.
Thresholds verified for 2026/27; check gov.uk before relying. Information, not advice.
Worked example: £120,000 assignment
At £500/day for 220 days you invoice £110,000 + VAT. Under standard VAT accounting you charge £22,000 VAT and reclaim maybe £600 of input VAT on software and kit — net payable to HMRC roughly £21,400. Under FRS at 14.5% you pay £15,950 — keeping about £5,450 more, which is why FRS is the default for low-spend consultancies. But run the 16.5% limited-cost-trader test first: at that rate the payable becomes £18,150, and a heavy-investment year (new kit, subcontractors) can flip the answer. Recalculate annually — your accountant should model both every year-end, and the numbers feed straight into the take-home tables your rate negotiations rely on.
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