The changes announced, though they don’t come into effect until next year at April 2017, are significant and will affect the amount of VAT that many small businesses have to pay.
The VAT Flat Rate Scheme simplifies businesses’ record keeping, and makes it easy to work out the VAT they have to pay.
So what’s it all about?
Normally a business deducts the VAT on its inputs (what they buy) from the VAT charged on what they sell (outputs).
Under the Flat Rate Scheme, that two stage process is simplified to one step.
For example, the flat rate percentage for a clothes shop is 7.5% – so if the owner of that shop sells a dress for £120 including VAT of £20 he will pay a flat rate of £9 (£120 x 7.5%) to HMRC. The flat rate percentage for a detective agency is 12%.
Exactly which sales count can be complicated – the details can be found on the HM Revenue and Customs (HMRC) website.
The percentages for each type of business vary for example for accountants it’s 14.5% whilst for dealers in wholesale scrap and waste apply 10.5% and some farming or agricultural activity just 6.5%. All full list can be found here.
The flat rate scheme is designed to give the government roughly the same amount of VAT, but should be much easier to work out.
However, because it is an approximation, some businesses will pay more, and some less. The government is concerned that some businesses are using the Flat Rate Scheme to pay less VAT than is appropriate
The changes
Chancellor Philip Hammond, in his Autumn Statement announced changes which affect businesses that have a very low cost base. These businesses are now called “limited cost traders”.
Limited cost traders can still use the Flat Rate Scheme, but their percentage will be 16.5%. So if they sell £120 of work, including £20 of VAT, the flat rate amount is £19.80 (£120 x 16.5%).
A limited cost trader is defined as one that spends less than 2% of its sales on goods (not services) in an accounting period.
When working out the amount spent on goods, it cannot include purchases of:
- capital goods (such as new equipment used in a business)
- food and drink (such as lunches for staff)
- vehicles or parts for vehicles (unless running a vehicle hiring business)
A firm will also be a limited cost trader if it spends less than £1,000 a year, even if this is more than than 2% of the firm’s turnover on goods.
Who’s affected?
Labour-intensive businesses where very little is spent on goods will see and increase in the amount of VAT they pay. For example, this may affect IT contractors, consultants, hairdressers and accountancy firms.
It will also affect construction workers who supply their labour, but where the raw materials are provided by the main contractor.
Though the new rules don’t come into effect until 1 April 2017, they may affect invoices issued, and goods bought, from now on.
There is more about these “anti-forestalling” rules at sections 8.2 and 9.7 of the newly updated HMRC leaflet on the Flat Rate Scheme.
The scheme can be more complicated than expected which why it’s worth speaking to VAT specialists if you’re unsure about the impact on your business. Give us a call today if you’d like to discuss the implications for your business. If you’d like to read more about our VAT service take a look here.
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