Contractors working for limited companies and umbrella companies should by now be aware that VAT is set to rise next week from its present rate of 17.5 per cent to 20 per cent. The change comes into effect on midnight on the 4th January.

It’s as well to be clear, though, about exactly which items will be affected. Only those items which are charged at the standard rate of VAT will be subject to the increase. Goods and services which had hitherto been rated at zero, reduce rated or exempt from VAT will continue to be unaffected.

This might seem relatively straightforward on the face of it but a small business group has recently issued a warning to smaller enterprises that matters can easily become more complicated when the distinction is put into practise. The Forum of Private Business (FPB) has drawn attention to the way in which the VAT rise may affect accounting systems. Accounting systems will need to be altered in line with the VAT change so that invoices, sales records and transactions will be issued at the new rate from 4th January onwards.

The FPB’s Chief Executive, Phil Orford, explained that outstanding invoices for work or services genuinely carried out before the deadline can till be charged at the 17.5 per cent rate after 4th January, but for most small businesses, a new standard VAT code will need to be created for the 20 per cent rate. The previous code may also need to be retained for the outstanding invoices.

Freelancers working for umbrella companies should find that these adjustments will have been made by their firm, but those working for limited companies may be pleased to hear that HMRC will be taking a “light touch” approach with any errors in the first VAT return after the change.

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