Contractors! Why are you still on the flat rate scheme?

Contractors VAT Flat Rate SchemeIf you are a contractor and you didn’t switch back to the standard rate for paying your VAT back in April then you are almost certainly out of pocket already: and I’m not talking about just a few pounds.

In case no one has told you, or that you were blissfully unaware of HMRC’s latest attempt to squeeze contractors, the conditions of the VAT Flat Rate Scheme changed on 1st April this year (2017). Previously, contractors would charge 20% VAT on top of their invoice and then give 14.5% of their gross invoice to HMRC in their VAT return each quarter. This was clearly a simple, straightforward calculation and added benefit – so the majority of contractors took this option over the standard rate.

A 2% rise and £100’s out of pocket…

The new rate is 16.5% and applies to contractors who don’t sell large amounts of stock to other businesses. It is called the Limited Cost Traders scheme and applies to 99% of contractors (please speak to us if you’d like to know details of any exceptions).

In real terms, what the new rate means is that a contractor generating a turnover of £80k pa is £160 better by being registered for VAT. Hang on a minute, I hear you think! Maybe that is not as good as it was (at 14.5%), but £160 is still £160. Well, yes it would be – if that was all there was to it! But under Standard VAT Accounting you can claim back against the VAT on most of your business expenses. And now the value of doing so is very much in your favour.

But what about all the extra admin?

So, I have two pieces of really good news for you – to offset the fact that HMRC is on a contractors stealth attack mission again.

Firstly, if you use FreeAgent, you can work out your VAT return at the touch of a button even if you’re standard accounting for VAT (yes. It is no longer a time consuming, paperwork encumbered endeavour but you do need to know the rules). Secondly, just claiming back the VAT from your accountant’s fees alone is likely to recoup way more than your £160 benefit. Then, you have all the other VAT-back opportunities to consider: mobile phone bills, equipment purchases, overnight accommodation, etc…

In 99% of cases, there is no reason that a contractor should still be on the Flat Rate Scheme, giving hundreds of pounds per year more to HMRC than they need to be paying. In fact, it would be madness to still be stuck in this position.

Why didn’t anyone tell me? And what should I do?

Not wanting to be too unkind to my fellow accountants, but: YOUR ACCOUNTANT SHOULD HAVE TOLD YOU ABOUT THIS! If you were unaware I would suggest you go and ask them why they didn’t! Then I would ask them to send a letter on your behalf (because HMRC won’t accept an email or phone call on this one) requesting the change that will put more money back in your pocket.

Long before 1st April, we sent hundreds of letters (by snail-mail) getting all of our contractor clients switched over to the standard rate and ensuring they get access to the best deal. Once again, knowledge, communication and action combined to give the best service possible to our clients.

Please get in touch if you have any questions about your VAT choices.

Related free resources