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VAT Registration...

Blue icon now that the limited cost business rate has been introduced and is in full effect, should my contracting company be vat registered?

In the past, virtually every contractor could benefit from applying the Flat Rate Scheme (FRS) to their business which would mean that only around 13% to 14% of your VAT inclusive turnover would need to be paid to HMRC, which for most provided an extra £2,000 to £3,000 each year. HMRC got wise this, and from 1st April 2017 introduced a new category called “Limited Cost Traders” with a new Flat Rate Percentage of 16.5% of your VAT inclusive turnover. Essentially this means, that what you collect, you pay over.

If the FRS isn’t worthwhile, then it might be worth looking at the standard scheme – whereby you are in a position to reclaim VAT on all of your qualifying costs. The rule of thumb is the higher your qualifying costs, the more beneficial it would be to apply the standard scheme.

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