Retaining VAT Monies

[Jenme]

Hi,

Newbie here so I hope I'm not missing a trick with this question as I cannot get an answer I trust from HMRC. We've just set up as a Ltd company (OH is a IT contractor in the private sector and is inside HMRC) and my question relates to VAT. We will be obviously be charging 20% VAT on all invoices and being on the Higher Rate will only need to pay HMRC 15.5% for the first year of trading. Being inside IR35 means that we can't really claim anything back so so're not really going to have anything to offset.

With this in mind and what I've been told by HMRC today, we get to keep the 4.5% so my questions are, is this true and if so, will we need to pay tax on that 4.5%?

Can't quite believe it if it is true

Many thanks in advance.

[northernladuk]

What did your accountant say?

[Neil@Intouch]

It doesn't work out to be 4.5% extra for you to then take as salary. You charge 20% on your day rate and then pay 15.5% VAT on the total invoice including VAT to HMRC.

[northernladuk]

This help?

http://forums.contractoruk.com/accou...at-frs-ct.html

(OH is a IT contractor in the private sector and is inside HMRC)

What is 'inside HMRC'?

[Lance]

you mean "Flate Rate" rather than "higher rate"? Don't you?
If not then you've got a real lot of reading to do.

To answer the question you're probably asking. Yes you need to pay tax (corporation) on the profit you make from the VAT flat rate scheme.

[TheCyclingProgrammer]

you mean "Flate Rate" rather than "higher rate"? Don't you?

I assume OP meant they are on the higher limited-cost trader rate, but with the 1% discount in the first year.

OP - any surplus you make from the FRS is taxable income for YourCo - likewise, any input VAT you incur on any expenses (if any) reduces YourCo's taxable profit rather than being reclaimed on your VAT return (except on capital purchases over £2k). So yes, you keep the VAT surplus and it is included with the rest of your company's turnover when calculating your taxable profit.

If that surplus VAT is paid to you as additional salary, then you won't pay any extra corporation tax but will obviously pay extra income tax.

Don't get too excited though. On £100k + VAT turnover that equates to just £1400 in flat-rate surplus. After the first year when you revert to the full 16.5% rate, that drops to just £200 (probably less than the VAT charged by your accountant) so you'll probably want to reconsider being on the FRS at this point.

[Neil@Intouch]

you mean "Flate Rate" rather than "higher rate"? Don't you?
If not then you've got a real lot of reading to do.

To answer the question you're probably asking. Yes you need to pay tax (corporation) on the profit you make from the VAT flat rate scheme.

The OP is inside IR35, so profit made on FRS will be taken as additional salary. Extra tax but higher take home pay.

[Jenme]

Thanks everyone - Yes, I meant inside IR35 not inside HMRC and yes, I've done heaps of reading and heaps of phone calls

Yes, we are part of the FRS, apologies just using the GOV.UK help page wording and so yes, that means we pay the higher rate.

So, with your feedback in mind, that small profit that is made on the FRS, could I use that to reimburse OH's accommodation costs and so therefore no profit is made.

...or am I really stretching it

[Lance]

So, with your feedback in mind, that small profit that is made on the FRS, could I use that to reimburse OH's accommodation costs and so therefore no profit is made.

Short answer is no.

Long answer is. Are you outside IR35? And do you need some accommodation in the same area at the same time? If the answer is yes to both then you have an answer.

IANAL

[Chart Accountancy]

The OP is inside IR35, so profit made on FRS will be taken as additional salary. Extra tax but higher take home pay.

I agree with Neil, the FRS is taxed as an additional salary. It will not be possible to earn any income under IR35 that is not taxed through PAYE.