The old Flat Rate VAT scheme simplified life for contractors, with signatories paying a set percentage of gross turnover as VAT.

However, changes coming into force from April may mean many contractors will soon be better off on the standard rate. Here’s an overview:

What are the Flat Rate VAT changes?

A new overarching entity (the ‘limited cost trader’) is set to be introduced from April.

This will include any trader whose inclusive VAT expenditure on goods (excluding capital expenditure, food/drink and vehicles/fuel) is either:

  • <2% of VAT inclusive turnover
  • <£1,000 pa in total

According to the government, this change should “prevent traders buying either low-value everyday items or one-off purchases in order to inflate their costs beyond 2%.”

In reality, this change to the Flat Rate VAT scheme is likely to mean a hike in VAT bills for typical service-based contractors and consultants from 14.5% to 16.5% of gross turnover.

How can contractors prepare?

If you’ll be classified as a ‘limited cost trader’ but are already signed up to the old Flat Rate VAT scheme, consider whether to switch to the standard VAT scheme.

With the standard rate scheme, you add up VAT charged to clients. You then deduct VAT paid on goods and services and pay the difference to HMRC.

Contractors who spend over 1% of turnover on goods and services covered by VAT may benefit from switching to the standard rate. However, the best advice for contractors is to speak with a specialist contractor accountant.

Call on the friendly team at 3 Wise Bears for more accounting tips for contractors.