Late payment could be responsible for contractors’ VAT arrears

With ongoing controversy over the issue, the problem of late payment has once again hit the headlines, at least in the world of contractors and other independent professionals, as it has been revealed that big businesses failing to pay their suppliers on time could lead them into VAT arrears. A financing advisory body has indicated to HM Revenue and Customs that they believe that this could be a factor in at least some cases of unpaid VAT, pointing out that many smaller businesses could be pushed past the deadline for payment of their VAT bills while they wait for debts to be settled by their larger clients.

The problems caused by those businesses who pay late are by no means a new topic of conversation for those who represent contractors, sole traders and small businesses – indeed, it has been one of the main discussion points amongst the newly-formed Small Business Commissioner panel. However, there has been some level of disagreement as to the best way to tackle the problem, meaning that freelancers, contractors and small businesses are still finding themselves in the position of being unable to settle their own bills on time, which can mean that they incur additional costs in the form of penalties and interest.

The fact that the rate of VAT increased to 20 per cent in 2011 has also been cited as a reason that some might be finding it hard to meet the deadline, with many incurring significantly larger bills than they would have been used to at the old rate. With official figures showing that the outstanding total of VAT owed to HMRC in overdue VAT payments standing at £2.6 billion, there is little doubt that at least some of that figure can be accounted for by businesses who are experiencing difficulties getting their invoices paid in a timely manner.

If you are considering making the change to contracting and want to know more about the financial implications, then our guide to the Flat Rate VAT Scheme will help you to understand more about the options available to you. We also have a take-home pay calculator which will give you some idea of your potential earnings and our contractor case studies provide some useful insight into what life is like once you work for yourself.