Increased VAT for contractors, lesser savings

Increased VAT for contractors, lesser savings

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Although the Autumn Statement 2016 didn’t make any big revelations across industries and functions, it did confirm that the recruitment agency/end client will now be held responsible from April 2017 to determine the IR35 status of limited company contractors operating in public sector.

Another blow was the removal of 5% tax-free allowance that the flexible workforce benefitted from. But wait – there’s one more change and unlike disguised remuneration crackdown and IR35 reforms, there has been no consultation on this one and that is the increased VAT for contractors.

The step is taken to tackle abuse of VAT Flat Rate Scheme

Yes – Philip Hammond mentioned that the government will introduce a new 16.5% rate on the Flat Rate VAT Scheme from 1 April, 2017 for businesses with limited costs and by nature of work, this also includes a vast majority of contractors. This basically removes the benefit of FRS for contractors as there won’t be much to save.

For instance, if an IT contractor earns £100,000, then he or she would have earlier observed a flat saving of £3,800. However, thanks to the new rules, this saving will reduce to just £200. There are speculations of some contractors, who are genuinely operating outside IR35, to switch to standard VAT rules despite the administrative pressure – but that only time will tell.

Want to get clarity on how much VAT you will have to pay from next year? Get on a call with us 0203 507 0022 and we’ll sort you out.