Union UCATT warns that flat rate VAT schemes are storing up problems for the future
Becoming VAT registered could come back to haunt self-employed builders
Accountants OBK Tax LLP promise: “Most sole traders and limited companies are entitled to a VAT reclaim”.
This seductive offer is based on the fact that sole traders and small firms might be able pay a flat rate of VAT, typically around 10% for a self-employed builder, but still charge customers the full 20% rate and effectively pocket the difference.
OBK Tax suggests that clients such as builders backdate their VAT records and claim a refund from Revenue & Customs for the difference between the full rate and flat rate VAT going back up to four years.
OBK takes a cut, the umbrella employment company that the builder is registered with takes a cut, and the builder gets what's left.
But construction union UCATT is warning that these schemes can be storing up problems for the builder who is now VAT registered because the taxman will be expecting quarterly returns.
The union says this will come as a shock to many workers who are not used to keeping VAT records and assumed the refund was a one-off process.
"Problems arise if the construction worker does additional work, or works for someone else entirely," it warns.
"The new or additional employer will probably not ask if the worker is VAT registered – they won’t expect it –and the worker in all likelihood has forgotten and won’t include VAT on their invoices.
"They’ll also forget that they have to do a VAT return each quarter. When HMRC doesn’t receive a return, they estimate the amount of VAT due based on previous returns and send
The union has accused OBK of “taking advantage of construction workers to make a quick profit and then leaving them in a situation they're not equipped to deal with”.
Brian Rye, National Secretary of construction union UCATT, said: “We are used to scams and dubious practices in construction but the flat rate VAT scheme is particularly cruel as it has long–term consequences for workers, even if they have changed employment.”
OBK Tax have not got back to me.
UPDATE: OBK Tax LLP have now responded saying "The Flat Rate Scheme is not a scam or a dubious practise, it is highly beneficial and the chosen VAT scheme for most contractors, subcontractors and freelancers."
It said that no third party company such as an umbrella firm would receive any cut of a VAT rebate.
Its statement read: "OBK engages with all of its clients on an ongoing basis, clients who are registered for the Flat Rate Scheme (FRS), will have their quarterly VAT returns completed by OBK which will result in continuous quarterly VAT rebates for the client.
"In some instances, the client may even be eligible to backdate their VAT registration. In these instances, the backdated VAT rebate would be paid to the client in addition to their ongoing quarterly payments.
"In some circumstances, our clients may wish to voluntarily deregister from the FRS, for example, they stop making taxable supplies or become directly employed on PAYE. OBK provides a fully comprehensive service and as such, should our client wish to deregister from the FRS, all our client would have to do is contact our friendly customer services team and OBK would liaise with HMRC, submit the clients final VAT return and take care of all of the necessary administration."