PCG advises contractors to ensure they're on the right VAT Flat Rate

Thursday 26 June 2014

VAT and tax compliance can feel like a burden for many contractors and other self-employed individuals. That's why so many turn to accountancy services to help get their house in order.

For those that don't have assistance or are new to the field, the PCG has advised that they ensure they are on the right VAT Flat Rate Scheme category for their sector.

In a release, senior public affairs manager at the body, Andy Chamberlain, explained that it has come to the PCG's attention that a small number of independent professionals have been contacted by HM Revenue and Customs (HMRC) because of how they are classified under the VAT Flat Rate Scheme.

"If the business operates under a category with a lower percentage than the one which should apply, then it could be required to pay the difference should this ever come to light. HMRC have recently re-classified a number of businesses, leading to the businesses affected receiving substantial demands for historical underpayment of VAT," Mr Chamberlain said.

The levy is calculated as the difference between the VAT charged to customers and the VAT paid on business purchases. However, this model doesn't always work, so HMRC introduced the Flat Rate Scheme in 1995, which allows companies with a turnover of less than £150,000 net of VAT to opt-in and pay VAT as a fixed percentage of its VAT inclusive turnover.

This is designed to make VAT much easier for the self-employed, especially when it comes to administration.

When it comes to working out the classification, HMRC has allotted VAT percentages based on types of trade. There is considerable variation between the different areas, making it vital all self-employed persons are in the right category.

In some instances where HMRC has identified independent professionals paying less VAT than required for their classification, the case has been overturned at Tribunal in favour of the individual. However, the risk is still high.

According to the PCG, those that have been contacted by HMRC should speak to their accountant as to whether they have a case for appeal.

"Unfortunately, like most things connected to taxation, there is the potential for things to get complicated, so I would urge you to seek advice from your professional advisor or take advantage of PCG's free tax helpline provided to you as part of the PCG Membership if you are under any doubt about which category is the right one for your business," Mr Chamberlain concluded.

To join the Flat Rate Scheme for VAT, self-employed persons can register at the same time as signing up their company. If this is done near the time of VAT registration, it is possible to begin using the scheme from the day a company is registered for VAT.

Applicants will be notified by HMRC if they have been successful in their efforts to join the Flat Rate Scheme and from which day it will start. This is usually the commencement of the VAT period following receipt of the application.

By Victoria McDonnell

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