Many contractors are VAT registered and have signed up to use the Flat Rate Scheme (FRS).  It makes filing your VAT returns easier and with limited business costs, the business can make money on the scheme by paying less to HMRC than the business collects from its customers.

HMRC are not happy and have changed the rules!

The new rules require an extra check to be performed each time a VAT return is filed.

What are the new checks?

Assuming VAT returns are completed quarterly then the business must check how much is spent on goods in the three months.

  • If the amount spent on goods is less than £250 (inc VAT) or if;
  • the amount spent on goods is less than 2% of sales (including VAT);
  • then the business must use a flat rate percentage of 16.5%.

Goods do not include services like accounting fees or mobiles.  The rules specifically exclude travel and subsistence and capital items (computers, printers etc. that is items that will last a while).

Clearways Accountants wrote to HMRC and BIS stating that the aim of the FRS was to make VAT simple and this extra test adds unnecessary complication. We also stated that there should be no distinction between VAT on goods and VAT on services. Both are legitimate business expenses and the VAT legislation should not create good and bad VAT. We have been ignored.  The new changes start on 1st April 2017.

So what does it mean for you?

We have looked at the numbers and if your turnover exceeds the VAT registration threshold then as a contractor company it is very likely that you will be a low cost trader and therefore have to use the 16.5% rate.

In this case, we would recommend a change to the cash accounting scheme. You will need to keep track of your VAT on expenses.

What if you are below the VAT registration threshold?

At Clearways Accountants we have looked at the numbers. If you are a client of Clearways Accountants you will pay a higher monthly charge if we complete your VAT returns, £99 plus VAT compared to £75 plus VAT, if we do not complete your VAT returns.

It will be more cost effective to remain VAT registered and change to the cash accounting scheme if you incur further costs of £45 per month (plus VAT) or more.  These costs could include any training, mobile phone costs, subsistence, hotel expenses and staff entertaining.  For most contractors changing to the cash scheme will be the best option.

If you do not have expenses in addition to our fee of £45 plus VAT per month and your turnover is below the registration threshold then you may want to de-register.

If you need help with making a decision on the best option, then please give us a call to chat through your particular contractor business situation.