Self-Employed, CIS subcontractor and VAT

[Nihtilan]

Hi everyone,

This seems to be a bit of a taboo subject and no one really wants to share the knowledge bag of goodies, but I'm hoping I will be able to find some answers here.

Basically, a friend of mine is self-employed and works as a CIS subcontractor for a company (contractor). He gets paid on a weekly basis and his payments get deducted @20%. A certain accounting company (won't divulge the name) approached him a couple of days ago and they offers their services to deal with his VAT affairs. I'm uncertain how they actually found about him, but most likely the contractor he works for has some kind of agreement with this company.

According to them, based on a weekly income of £500, he is entitled to an annual VAT rebate of £632.

It's noteworthy to mention that he's not VAT registered and from what I've read from HMRC's website, he doesn't really qualify for VAT. I also found something about Flat Rate Scheme, but I'm uncertain how this applies to him.

Can anyone please share some light on this subject?

Thank you in advance!

 

[Scalloway]

It is possible to register for VAT voluntarily. If you go on the flat rate scheme you pay a fixed percentage of your turnover to HMRC. The rate used for calculating VAT payable is less than the 20% charged to recompense for VAT recoverable on expenses.

It is a simple way to deal with VAT for small traders but means more admin. If your turnover are below the VAT registration threshold of £81,000 a year you need to think if it is really necessary to register.

 

[Newchodge]

Ask them to provide the details of a number of satisfied clients and check the references before going anywhere near them. Sounds like a scam to me - if he is only getting £632 back, what do they get? If he does have an entitlement to it why can't he claim it himself?

 

[MyAccountantOnline]

Are you sure its VAT not Income tax?

 

[kevin.doran]

I've actually heard similar stories over the past year. I've got a bunch over CIS subbies, railway workers. They all phoned me separately not so long ago asking if they could claim VAT refunds as colleagues of theirs were doing so through another accountant.

Some form of VAT fraud quite possibly...

 

[David Griffiths]

Not VAT fraud at all!

The subbie registers for VAT, and opts for the flat rate scheme. The "profit" is the difference beween the 20% VAT charged to the contractors (£4,800 based on 48 weeks at £500) and the VAT paid to HMRC on the flat rate. Normal percentage would be 14.5% so VAT actually paid would be £4,176.

That's £624 in a normal year. More in the first year with the 1% discount.

Hardly rocket science is it?

 

[UK Contractor Accountant]

Do it all the time and also back date the vat registration where the previous accountants do not advise on the benefits of the flat rate scheme for service based businesses.

 

[David Griffiths]

The main issue with doing it in practice is making sure that the subbies don't spend the VAT each quarter before they have to pay it over!

There can be confusion (not confined to this arrangement) is that VAT and CIS deductions are the same amount. So the subbie earns £500, bills the contractor for £600 (inc VAT) and gets paid £500. Well, that's obviously all his, isn't it? £500 is what he earns after all.

 

[kevin.doran]

These particular subbies were earning £20-30k a year and were on their third straight quarterly rebate in excess of £2.5k each by the time it was run past me. Reclaim on tools & equipment was mentioned although no such purchases were ever made and to the best of their knowledge the subbies involved didn't even realise they were VAT registered! It completely stunk...

 

[kevin.doran]

Re-reading the OP though I do however acknowledge I've gone off on a bit of a tangent here given the figures involved are completely different.

 

[Nihtilan]

Not VAT fraud at all!

The subbie registers for VAT, and opts for the flat rate scheme. The "profit" is the difference beween the 20% VAT charged to the contractors (£4,800 based on 48 weeks at £500) and the VAT paid to HMRC on the flat rate. Normal percentage would be 14.5% so VAT actually paid would be £4,176.

That's £624 in a normal year. More in the first year with the 1% discount.

Hardly rocket science is it?

Basically you're saying that you can claim VAT refund on CIS deductions?

Actually let me illustrate with an example..

Let's say I earn £600/w. £120 go to CIS deductions and I get paid £480. From what you're saying I can claim 120(20%)-87(14.5%)=£33/w.

But is it legal/ethical to do that or is it a loophole in legislation or?

 

[Scalloway]

Your invoice to the contractor would be

Work done..........£600
VAT @ 20%...........120
Total........................720
Less CIS................120
Cash Received....£600

VAT charged on your invoice............................£120
Flat rate VAT @ 14.5%X£600 due to HMRC... £87

You are ahead by £33.

 

[David Griffiths]

Your invoice to the contractor would be

Work done..........£600
VAT @ 20%...........120
Total........................720
Less CIS................120
Cash Received....£600

VAT charged on your invoice............................£120
Flat rate VAT @ 14.5%X£600 due to HMRC... £87

You are ahead by £33.

Wrong.

Flat rate VAT = 14.5% x £720 = £104.40

 

[Scalloway]

You're correct! So the OP gains £15.60.

 

[Nihtilan]

Thank you for all your replies.

So you calculate FRS VAT (14.5%) based on the amount incl. 20% VAT (good to know).

There is just one thing that I don't get. Why is cash received £600 when in fact it's £480?

Also, if you do register for FRS VAT do you have to give the contractor your VAT number?

LE: Let me rephrase the last paragraph because it's a bit dull.. what if the contractor does not aprove of your VAT? Basically, you're asking for more money..

 

[Newchodge]

You 'receive' the tax that has been deducted as it goes to reduce your tax liability.

 

[Scalloway]

Why is cash received £600 when in fact it's £480?
Because you also receive £120 of VAT which belongs to HMRC

If you do register for FRS VAT do you have to give the contractor your VAT number?
Yes because he will need it to reclaim the VAT you have charged him. He shouldn't object to paying you VAT because he should be able to claim it back. But you would be better speaking to the contractor before you register so he knows the score.

 

[Nihtilan]

Thank you for your reply @Scalloway .

Also, the company that I mentioned in my first post said that they can claim VAT on the sales that were made prior to VAT registration. How exactly does that work?

 

[Scalloway]

You can backdate the registration and bill your customers for VAT on invoices previously issued. Whether the customers pay these VAT bills is a different question. You could end up having to pay over the VAT yourself from the money you have already received and end up worse off.

Again I recommend speaking to your customers before you go a ahead.

 

[Scalloway]

A limited company is only a good idea if you have a good accountant to advise you. It is not a step to be taken lightly.

Edit
This forum is full of people who have started a limited company then regretted it.