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Contractors to Lose Out in Flat Rate VAT Changes

Contractors are once again in the firing line, with changes to the VAT flat rate scheme (FRS) announced in the Autumn Statement. The scheme was originally designed to simplify VAT reporting and reduce red tape for small businesses and contractors. However, in what appears to be an attempt to blame the self-employed for declining tax revenues, the Chancellor will introduce more bad news for contractors who are having to foot the bill for non-compliance from other sectors.


Under the scheme, businesses can charge clients VAT at 20 per cent, and then pay it back to HMRC at a lower rate depending on the sector they operate in. The FRS is also based on a percentage of turnover as a whole rather than the difference between sales and purchases. The scheme has reportedly been hijacked by much larger organisations exploiting the benefits and has caused the government’s decision to make significant changes in the coming year.


From 1 April 2017 the government will introduce a new 16.5 per cent rate for businesses with limited costs, such as many labour-only businesses. Currently there are a range of rates used, dependent on the sector the business is in. Accountancy and legal services, for example, pay 14.5 per cent, whereas estate agents and property management pay 12 per cent. With the move to a higher flat rate for all, most of the benefit for contractors will be lost.


Contractors who use the FRS should talk to a contractor accountant about the best thing to do prior to the new rules coming into force next year. A careful analysis will need to be made to determine the most cost effective option, one being deregistering from VAT if trading activity is under the VAT threshold of £83,000. However, the best approach will depend on individual circumstances. It’s a shame that the many genuine contractors who use the scheme as it was intended are being penalised because of a few who decided to play the system.


There are a few months before the changes come into effect, but contractors should be prepared. Contact us if you have any queries.