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Autumn statement brings bad news to contractors

30/11/2016 04:21 pm

Last week UK‘s Chancellor Philip Hammond delivered    the Autumn Statement. The Statement had some important and not such good news to the contractors – there will be changes to the Flat Rate VAT Scheme (VAT FRS). Starting 1st April 2017 businesses, which do not have to be registered as VAT payers and can be identified as having ‘limited costs‘ will be charged at a new 16,5% rate. As a number of our clients belong to the concerned group, we advise to read this blog post.

How did VAT FRS work until now?

Until now quite a large number of contractors and small business owners were using VAT FRS as it helped them to save some taxes. Contractors would register as VAT payers even though their turnover did not reach the VAT threshold of £83,000 so they could use the benefits.

The VAT flat rate depends on the business type, so contractors operating in different fields were paying different tax.

Example. A contractor in transport business bills a client for £1,000. He adds 20% VAT and in total it makes £1,200. As he is in transport business, his VAT flat rate is 10%. Therefore, his flat rate payment will be £120 (10% of £1,200). This means that because of VAT differences a contractor could save extra £80.

Businesses that incurred little expenses and operated in a sector with a low VAT rate, could enjoy paying less to HMRC than they would at a standard rate.

No more benefits after April

Even though VAT FRS will continue to operate, the scheme will be less tempting.

All limited cost traders will be now charged at 16,5% VAT rate. Limited cost traders are those, whose VAT inclusive expenditure on goods (not services) is either:

  • less than 2% of their VAT inclusive turnover in a prescribed accounting period;
  • greater than 2% of their VAT inclusive turnover but less than £1000 per annum if the prescribed accounting period is one year (if it is not one year, the figure is the relevant proportion of £1000).

And that is quite a big group of unhappy contractors!

The new 16,5 % VAT rate means that for many small contractors benefits of using VAT FRS are gone as there is no longer credit to make for VAT incurred on purchases. Also, as the focus is on goods instead of services, companies that incur VAT on services are left behind.

What to do next? Our recommendations

Right Accounts recommends contractors, who are operating under the VAT threshold of £83,000, to leave the scheme.

Also, we did some calculations to check whether it was still worth for a contractor to be operating under Ltd or it was better to become an employee. Our calculations demonstrate that even under the new rules, it is still better to remain Ltd. You can see our test calculations here.