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The majority of IT contractors are going to be bringing in over £85k/annum, which means they're going to be registered for VAT, which means they will be providing VAT invoices to their client, which means their client is going to claim the VAT back from HMRC.

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So what? The company still generated the VAT revenue.

The customer gets a refund, but has to charge their own customer VAT on the full amount of the goods they are selling, so the VAT accumulates until it is paid by someone who cannot claim the VAT back

That's why it's called "value added tax" - each supplier in the chain generates VAT on the value they add.

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