The Association of Taxation Technicians believe there is a flaw in the Flat Rate VAT that needs to be addressed. Otherwise, freelance consultants, including IT contractors, will be overcharged VAT.
The Association stated that the tax tribunal had called for a rethink of VAT assessments for users of the Flat Rate (FR) scheme.
In the UK, not all occupations come under the FR scheme, which allows users to select their own category. There is no consensus between the users and HMRC over the category the users should be in, and this is causing problems when it comes to IT contractor accounting.
Typically, an IT contractor would opt for the “Other” category of “Business Services Not Listed”, as it has a tax rate of 12%. However, the tax office categorises them as management consultants, thereby putting them in a higher tax bracket of 14%. In some instances, HMRC also elevates freelance consultants to a higher tax rate of 14.5%.
HMRC has a guidance stating that if a person works as a consultant and does not fit into one particular sector, they can choose management consultancy. However, the courts have clearly stated that the traditional notion of management consultancy does not align with present-day freelance consultants.
HMRC has started issuing retrospective tax assessments claiming that the original selection of category or sector was unreasonable. This move has not been supported by tribunal courts.
Association of Taxation Technicians President Michael Steed opined that HMRC should amend its guidance and accept that honest small businesses have selected the right category as stated by the law, and to make sure that self-employed, small business owners are not paying too much tax. There should also be assurance that such professionals will not be penalised or endure back assessments in the future.