Ten years ago as our contractor client base exploded, I was faced with a dilemma, many of the clients insisted on registering for VAT under the threshold. My thoughts returned to disputes with VAT whilst running my racing business, their intransigence, their draconian penalty schemes and their collectors divine right to all you own, to settle such penalties and interest. Imagine my reply, to those clients? However with glee, they proposed the benefits of such a decision, largely given by other accountants, many Chartered.
Foolhardy, greed or just plain stupid.
The above was my reply, further to which I added, so you register for VAT, then the Flat Rate Scheme, you apply the 10% rate to gross income and keep the balance, the sum of which dictates that a contractor on 30k could expect to receive unearned income in the region of 2.5k, this would pay your corporation tax at the year end!
I may be stupid, but do you think HMRC would endorse this? to my amazement they did! agreeing with my analysis of the situation, but were not able to stop contractors registering. We lost clients as they migrated to accountants who endorsed the scheme. I remained safe in the knowledge I was using my skills and due diligence to arrive at a conclusion which would not jeopardise my clientele.
Phil vindicates our decision
The chancellor recognised the anomaly and placed a fix within the budget statement, requiring all single contractors to state their purchases beyond 2% of gross, but precluding those which are available to the contractor, fuel, meals etc. Unable to pass the FRS test they must apply a new contractor rate of 16.5% the mathematically inclined amongst you know that the figure was chosen with care, in that, you now become a collector of output tax for the Chancellor with rewards measured in pence not pounds.
We have had the good fortune to see some of the clients that migrated return, to engage our services again, I am overjoyed at their return and make no remarks about VAT. I may become animated though if I spot the next quick buck and need to protect my clients.