VAT Flat Rate Schemes

We have become aware that there appears to be an increasing number of firms claiming to be tax rebate specialists who sell the idea that they can achieve additional rebates and secondary sources of income by playing the VAT system. HMRC is quite clear that VAT is not designed to produce additional profit, so anyone who uses it for that purpose needs to be aware of what they are getting themselves into.

Firms calling themselves rebate specialists often approach construction firms and employment agencies asking to be introduced to the workers or subcontractors. In return they offer a slice of the action if they sign up, which they can afford to do by taking 25% – 30% of whatever they can take out of the VAT scheme. It is sometimes sold as ‘what’s good for the subbies must be good for you’ or ‘giving the subbies a rate-rise that costs you nothing’.

What is the VAT Flat Rate Scheme?

The Flat Rate Scheme (FRS) is designed to simplify the VAT process for small businesses who have a turnover less than £150,000. Once registered for FRS you charge VAT at 20% on all goods and services provided and then for construction trades, you pay over 14.5% of the grossed up figure to HMRC, leaving a small profit. However, with some of these schemes the profit for the individual can soon be wiped out by increased accountancy costs, having to knock VAT off expenses claims, losing the VAT on any large purchases, invoicing and book keeping, and a loss of competitive edge against those who remain outside VAT registration.

It’s an HMRC scheme, so what are the risks to my company?

There is a good reason why VAT registration is not mandatory until you turnover £83,000. VAT, and even the FRS, is complicated and micro business quickly get into trouble. Once VAT registered the individual subcontractors have to remember to charge VAT on everything to all clients, even outside CIS. This often means that they are uncompetitive and break the law by doing cash jobs which was never an issue before. VAT invoices need to be produced and maintained and the subcontractor has to retain enough money to pay his VAT returns.

Ultimately, the VAT returns belong to the individual subcontractor. The individual is the one that signs off the returns so if they are later found to be wrong and penalties are issued - it will be against the individual - not the so call tax rebate expert. If a construction company introduces one of these rebate experts to his subcontractors, it is likely that those subcontractors will knock on his door if, or when, it goes wrong. The risk of reputational damage and hassle should not be ignored.

If my firm is approached, what should I do?

As with most things if you are being offered a payment for little work, it should be approached with caution. If a subcontractor asks you about one of these schemes we recommend that you point them towards their accountant. We would say only ever use a Chartered Accountant for something like this, many of these rebate specialists are not, and are therefore unregulated. Always ask the person selling the scheme if he is a Chartered Accountant or Chartered Tax Advisor, if not walk away. If you have any questions, please call us on 01262 401040.