Contractors' Questions: Should I deregister for VAT due to the FRS changes?

Contractor’s Question: Due to the VAT Flat Rate Scheme introducing a ‘limited cost’ trader category should I de-register for VAT, given that I am well under the threshold and that less than 1% of my turnover is VAT chargeable?

And is it likely many IT contractors are deregistering and, if so, what impact will this have on the exchequer? If a negative one, are we storing up trouble later on by de-registering now?

Expert’s Answer: Since April 1st 2017, there is a higher 16.5% VAT flat rate for businesses with limited costs. Providers of professional services such as IT consultants, lawyers and architects whose current rate is 14.5%, will almost certainly be considered limited cost traders as they do not spend much on goods, resulting in an increase of 2% in the VAT payable to HMRC.

HMRC has produced a list of goods (see 4.6) that it does not recognise as costs for the low cost calculation -- this includes IT equipment which would be one of the main items an IT consultant might otherwise have considered to be a genuine cost of the business.

To deregister, you have to be under the VAT threshold which is £85,000 from April 1st 2017. The benefit of de-registering is that you will avoid the inconvenience and responsibility of completing VAT returns. An alternative would be to remain VAT registered, but withdraw from the Flat Rate Scheme. This means that you would pay VAT on the 1% of your turnover to HMRC, but recover VAT on any costs you incur, other than costs such as entertaining. If your turnover is less than the VAT threshold, and only 1% is chargeable to VAT -- assuming that this is because you provide most of your IT consultancy services to clients outside the UK -- whatever decision you make will not have a noticeable impact on the exchequer. This is because the benefit of you being on the FRS is due to the administrative convenience, rather than a significant financial saving.

The expert was Adrian Houstoun, partner at chartered accountancy firm Kingston Smith LLP.

Monday 24th April 2017