Contractors and VAT registration

I am a contractor and presently my turnover is under the VAT registration threshold. Lots of my friends have registered for VAT early and are using the Flat Rate Scheme, because they claim they can make money from the scheme. How do I know if the Flat Rate Scheme might work for me? 

1st October 2016

Under the Flat Rate Scheme:

  • you charge your customers the standard rate of VAT
  • you cannot recover the VAT on any of your expenses, unless they are certain capital items costing over £2,000
  • you pay HMRC a fixed rate of VAT based on the industry you operate in and your VAT-inclusive sales figure
  • if the amount of VAT you’ve charged customers is greater than the fixed rate you pay HMRC, the business gets to keep the difference

The Flat Rate Scheme is less onerous because expenses can be recorded including the VAT. It can also be lucrative, but only under certain conditions such as:

  • you don’t have a lot of zero-rated or exempt income. Normally, you wouldn’t need to charge VAT on these, but under the Flat Rate Scheme, they are included within your total sales figure that you apply your industry-specific percentage to
  • you don’t make a lot of despatches to other Members States of the EC
  • your customers are generally other VAT-registered businesses. Otherwise, for unregistered businesses, the VAT represents additional cost because they are not able to reclaim it. If you’re more expensive than your competitors, you could lose customers

Please contact your local TaxAssist Accountant if you would like to discuss your affairs in more detail. 

By Jo Nockels

Disclaimer: The information provided is based on current guidance (at date of publication) from HMRC and may be subject to change. Any advice shared here is intended to inform rather than advise. Taxpayer's circumstances do vary and if you feel that the information provided is beneficial it is important that you contact us before implementation. If you take, or do not take action as a result of reading this information, before receiving our written endorsement, we will accept no responsibility for any financial loss incurred.

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