FLAT RATE VAT CHANGES – How Does it Affect YOU.
Small Businesses will find that the significant changes announced will increase the amount of VAT that they will have to pay.
This will affect your business if you use the VAT Flat Rate Scheme but which spend very little on goods, including raw materials – such as firms providing services, i.e., consultants.
The VAT Flat Rate Scheme simplifies businesses’ record keeping and makes it easy to work out the VAT they have to pay.
Our Government announced these changes in the 2016 Autumn Statement.
How does The Flat Rate Scheme work?
Under the Flat Rate Scheme, the process for calculating output VAT is simplified.
For example, the flat rate percentage for a Contractor shop is 12% – so if the contractor invoices his services for £120 including VAT of £20, he will pay a flat rate of £14.40 (£120 x 12%) to HMRC.
We provide advice to our clients on which sales count in the VAT calculation as this is complicated. We can provide you further advice on this and information is also on the HM Revenue and Customs (HMRC) website.
The percentages for each type of business vary.
The Government has designed the flat rate scheme so that they generate roughly the same amount of VAT, but it 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 and effectively profit from the scheme.
How is the VAT Scheme changing?
In the Autumn Statement, Chancellor Philip Hammond announced changes which affect businesses which have a very low cost base. These businesses are now called “limited cost traders”. Does this apply to you?
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 2% of the firm’s turnover on goods.
Will this affect You?
It will increase the VAT paid by labour-intensive businesses where very little is spent on goods. 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 main contractor provides the raw materials.
When does this start?
The new rules start on 1 April 2017, but may also affect invoices issued, and goods bought, from now on. HMRC have also issued strict rules about invoicing in advance and “anti-forestalling” on the Flat Rate Scheme.
The scheme can be more complicated than expected, and each business should assess whether they fall within the new rules. Contact us for more information on the matter and to check what impact this has on your business.