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VAT Flat Rate Scheme Changes for Contractors Explained

Published on Wednesday, March 1, 2017 in category:


In November’s Autumn Statement, the Chancellor announced changes to the VAT Flat Rate Scheme which introduced a new sector called ‘Limited Cost Businesses’. HMRC yesterday published further guidance on the changes and in this article we unpick the rules and provide a bit of analysis and insight into how this will affect contractors.

 

What is a limited cost business?

A limited cost business is defined as one which spends either “less than 2% of your VAT turnover, or greater than 2% of your VAT turnover but less than £1000 per year on relevant goods”. Put another way, almost every contractor, consultant or freelancer operating through their own limited company. And before you say, “Ah, but I spend a lot on travel, hotels and computer equipment”, these expenses are specifically excluded.

 

What are the changes?

If your business falls into this category – and if you’re reading this that’s almost certainly the case – then your Flat Rate Percentage will go up from 13.5% or 14.5% or whatever, to 16.5% of your VAT inclusive revenue. This basically means what VAT you collect, you pay, more or less.

 

 

Example: IT Contractor billing £500 per day

 

 

 

 

     Old Rules

         New Rules

 

 

 

 

 

 

 

Revenue (turnover)

       £120,000

             £120,000

 

 

VAT Charged

         £24,000

               £24,000

 

 

 

       £144,000

             £144,000

 

 

VAT Payable

         £20,880

               £23,760

 

 

 

          (14.5%)

                (16.5%)

 

 

VAT Surplus (Charged less payable)

           £3,120

                    £240

 

 

 

 

 

 

 

Obviously there is some disparity at the moment with different interpretation of what is the correct rate, but after 1st April, every contractor will be applying 16.5%.

 

If you want to know roughly what the cost will be to you, look at your Profit and Loss Account in your annual accounts, and there should be a figure for VAT Flat Rate Surplus or similar. Essentially you will be worse off by this amount.

 

What needs to be done?

That depends on what expenses you have, what your turnover is, and how long you’ve been trading:

 

Already Contracting

If your turnover exceeds £83,000, then you must continue to be VAT registered. As the benefit of the FRS is now non-existent, we advise moving to the standard rate scheme. That way you can reclaim the VAT on qualifying expenditure. Qualifying expenditure includes accountancy fees, mobile phone, hotel accommodation, stationery, IT equipment. It doesn’t include salaries, mileage, public transport etc. If your qualifying costs exceed £2,500 then the VAT you can reclaim will make it more worthwhile. Whether it’s worth the extra hassle is another question. You might be as well to continue on the FRS at 16.5%.

 

If your turnover is below £81,000 then you can choose whether to continue on the Flat Rate Scheme, at 16.5%, change to standard scheme and reclaim VAT on qualifying expenditure, or you can de-register for VAT altogether and avoid all the hassle. You don’t charge your client or agency VAT, and you don’t make VAT returns quarterly.

 

Just Starting Out

You don’t need to register for VAT until your turnover exceeds £83,000. Up until then it’s your choice. Based entirely on turnover and given that being VAT registered under the new rules is an inconvenience at best and a major pain at worst, we are advising holding off registering until absolutely necessary.

 

One small crumb of comfort in the first year of registration is the 1% discount. So VAT will be paid by you at just 15.5%. It still won’t be a huge amount but it might just make the transition more bearable. If your day rate is £500 this discount is worth £1,200 (assuming 5 days per week and 46 working weeks P.A.). If you want to know how much it’s worth to you, just multiply your day rate by 2.4.

 

Ultimately the decision on which route to take is yours to make. We can provide you with as much information as you need to make this decision, and in the meantime, here’s a wee steer on what we think:

 

  • If your qualifying expenditure exceeds £2,500 per year, Broome Affinity are advising to convert to standard VAT
  • If your qualifying expenditure is below £2,500, or if you don’t want the extra hassle of calculating the VAT on your expenses, stick to the Flat Rate Scheme on 16.5%
  • If your turnover is less that £81,000 you probably want to consider de-registering for VAT
  • If you’re just starting out, delay VAT registration until absolutely necessary

 

Broome Affinity clients will be receiving an email from us very soon explaining the situation as is relevant to their company. If you are not yet a client but would like us to provide you with analysis, please email info@broomeaffinity.com and we will be in touch.