Is VAT punitive for threshold contractors?

[IlCrYpTeDaTa]

Hi guys,

I am an IT contractor working in London, my turnover is around £84K PA and I charge £450 per day.

I can charge £550 per day however that would mean I would go over the threshold and bill after holidays and absences and downtime probably around £100K PA. Problem is, once you take off the 20% for VAT and add on the £3-4K I can claim back we're pretty much back at £83K. There seems to be no sense in upping my rate and in fact the time wasted in registering, managing my VAT account, reclaiming the measly £3-4K from my outgoings seems like a foolish waste of time and is punitive on small businesses working in and around the VAT threshold. The only one scoring is HMRC, making us run the extra miles for NO benefit. I don't need 'kudos' of charging VAT because my client list is enviable and potential clients don't mind that I don't charge VAT because my work is of a high calibre that this is not an issue. And the reward for that is spending hours and hours working out how to reclaim a fraction of what you are paying HMRC. No thanks!

Are any other contractors in this situation?

Hypothetically, Even if you earn £85,000,01 you end up paying £20K to HMRC - and reclaim maybe £4k so you're out of pocket a massive £17k compared to earning £84,999.00 where you pay no VAT at all - this is madness and extortion if you ask me on top of the Corporation tax and all the other income they're taking from small businesses.

[Lance]

1) You don't understand VAT. You don't 'pay' VAT, you collect in on behalf of HMRC.
2) You don't have to be VAT registered until you reach the threshold. If it bothers you that much take time off as you approach it.
3) Many agencies won't touch you unless you are VAT registered.
4) It saves you money. It may only be a few £k but it does save you.
5) The only people who don't do VAT are small traders, and that is usually because their customers aren't VAT registered so it does cost them more.

[VelcroPower]

That's not how VAT works at all.

You charge VAT on top of your day rate so if you earn £85k you bill £102k in total including the £17k VAT.

Say there were no expenses you pay that £17k over to the VAT man that you have received from the client that was always HMRC's money. You still get to have your £85k.

[vwdan]

What.....on Earth. I realise this is a professional forum but you seem to have such a failed grasp of VAT and what it means for you that I find it somewhat terrifying.

In short, when you're dealing predominantly with other VAT registered entities your VAT status makes no difference to how much you cost your client. They don't care whether there's VAT on top or not because it's a neutral cost for them that they claim back. Being VAT registered is only ever a negative when you're selling to the public or non-VAT registered entities because, yes, your costs increase by 20%. This is why most trade sales are all quoted ex-VAT.

Your day rate is your day rate, ex-VAT because that's all they care about. If your day rate is £100 and you're not VAT registered then you invoice £100. If it's £100 + VAT then you invoice £120. Obviously it's always worth making sure that you are quoting ex-VAT but that's the standard and only the dodgiest of tulip agents will try and pretend otherwise.

At it's most basic, you charge VAT on your invoice and fill in a return every 3 months and give that extra bit to the government. No drama, they don't and won't care and the admin is minimal.

Except now you're VAT registered you get to claim back VAT on your costs - so actually, there's an added bonus and you'll actually save money. Yay!

Register for VAT, and increase your rate if you can - job done.

[northernladuk]

Christ. I've been doing it all wrong. I'm gonna call the agent and suggest I drop my rate by a hundred quid to save lots of money!!!

[vwdan]

Christ. I've been doing it all wrong. I'm gonna call the agent and suggest I drop my rate by a hundred quid to save lots of money!!!

I can't fathom how somebody can be earning in the top few % of the country and yet get the basics of business (Which are well documented, well explained all over the internet) so utterly unbelievably wrong. OP, did you not do any research before becoming a contractor and taking legal control of a Ltd Co?

[DaveB]

Hi guys,



Hypothetically, Even if you earn £85,000,01 you end up paying £20K to HMRC - and reclaim maybe £4k so you're out of pocket a massive £17k compared to earning £84,999.00 where you pay no VAT at all - this is madness and extortion if you ask me on top of the Corporation tax and all the other income they're taking from small businesses.

Nope, you have completely failed to understand how VAT works.

At it's simplest level (disregarding flat rate and 1st year discounts, non-VAT registered clients etc).

You charge your day rate + VAT. So you bill your clients £85,000 + VAT at 20% = £85,000 + £17,000 = £102,000. You then pay the £17,000 VAT to HMRC leaving you with £85,000 before costs and corporation tax.

This calculation remains the same regardless of your day rate, you *always* add VAT and you always pay that amount to HMRC.

If you dont understand this you *really* need to get some professional accounting advice. One of the usual suspects here will no doubt be happy to help before you get yourself in a real mess.

[simes]

Hi guys,

I am an IT contractor working in London, my turnover is around £84K PA and I charge £450 per day.

I can charge £550 per day however …………………………... and reclaim maybe £4k so you're out of pocket a massive £17k compared to earning £84,999.00 where you pay no VAT at all - this is madness and extortion if you ask me on top of the Corporation tax and all the other income they're taking from small businesses.

Quite simply, you should get VAT registered, up your day rate and make an annual saving of your £3-4k.

[IlCrYpTeDaTa]

VAT seems a bit wonky

Ok so if I were to delay registering for VAT until I reached £85K earnings, then register, would I only collect VAT for the +/- £15K outstanding income for the earnings above the threshold? (ie, that would total around £3K for HMRC for VAT for my first year).
But then the next year I would be expected to claim VAT for the ENTIRE year - £100K? (ie, £20K VAT amount payable to HMRC in year 2).
Again this seems a bit wonky and lopsided in favour of HMRC.
Couldnt I just wait until I reached £85K income and THEN start charging VAT every year?

[northernladuk]

Ok so if I were to delay registering for VAT until I reached £85K earnings, then register, would I only collect VAT for the +/- £15K outstanding income for the earnings above the threshold? (ie, that would total around £3K for HMRC for VAT for my first year).
But then the next year I would be expected to claim VAT for the ENTIRE year - £100K? (ie, £20K VAT amount payable to HMRC in year 2).
Again this seems a bit wonky and lopsided in favour of HMRC.
Couldnt I just wait until I reached £85K income and THEN start charging VAT every year?

Why don't you speak to your accountant? Not only will they correct your thinking they may teach you a whole world of stuff you don't know that you don't know yet?

You are talking a lot of money here. Is thrashing around on free forum with a bunch of strangers the best way to fix such a horrible misunderstanding?