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.

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The Department for Work and Pensions has confirmed the thresholds for pensions automatic enrolment for 2017/18.

The main qualifying threshold or ‘trigger’ for employees to be automatically enrolled will be maintained at £10,000 per annum. The lower limit of the qualifying earning band and will be £5,876 and the upper limit £45,000.

The written statement also includes:

‘Automatic enrolment has been a great success to date with almost 7 million people enrolled by more than 293,000 employers. It will give around 11 million people the opportunity to save into a workplace pension and we expect this to lead to around 10 million people newly saving or saving more by 2018, generating around £17 billion a year more in workplace pension saving by 2019/20.’

With over a million micro (1 – 4 employees) and small (5 – 49 employees) employers reaching their staging date for auto enrolment in the last quarter of 2016/17 and throughout 2017/18 it is important to ensure employers comply with their obligations. The Pensions Regulator has confirmed the exceptions which apply to employers which can be found at on their website (see the TPR link below).

Please contact us if you would like help with auto enrolment compliance or to determine whether or not your business is exempt from auto enrolment.

Internet links: Parliament written statement TPR exemptions

The government has revealed ten of the most bizarre excuses used by unscrupulous business owners who have been found to have underpaid workers the NMW.

These employers used excuses such as ‘only wanting to pay staff when there are customers to serve and believing it was acceptable to underpay workers until they had ‘proved’ themselves’.

The government has launched an awareness campaign to encourage workers to check their pay to ensure they are receiving at least the statutory minimum ahead of the NMW and NLW increases on 1 April 2017.

Employers need to ensure they are paying their employees at least the NMW and NLW.

This will be the second increase in six months for the NMW rates. Going forward the NMW and NLW rates will both be reviewed annually in April.

In a recent article in the Employer Bulletin, HMRC cite common errors:s

• not paying the right rate, perhaps missing an employee’s birthday,
• making deductions from wages which reduce the employee’s pay below the NMW/NLW rate,
• including top ups to pay that do not qualify for NMW/NLW,
• failure to classify workers correctly, so treating them as interns volunteers or self employed and
• failure to include all the time a worker is working, for example time spent shutting up shop or waiting to clear security.

What are the penalties for non-compliance?

The penalties imposed on employers that are in breach of the minimum wage legislation are 200% of arrears owed to workers. The maximum penalty is £20,000 per worker. The penalty is reduced by 50% if the unpaid wages and the penalty are paid within 14 days. HMRC also name and shame employers who are penalised.

If you would like help with payroll issues please contact us.

Internet link: GOV.UK NMW news

In a change that will impact residential landlords, the amount of income tax relief available on residential property finance costs will be restricted to the basic rate of income tax. This change will mean that landlords will no longer be able to deduct all of their finance costs from their property income. They will instead receive a basic rate reduction from their income tax liability for their finance costs.

The restriction in the relief will be phased in over a four year period as follows:

• in 2017/18, the deduction from property income will be restricted to 75% of finance costs, with the remaining 25% being available as a basic rate tax reduction;
• in 2018/19, 50% finance costs deduction and 50% given as a basic rate tax reduction;
• in 2019/20, 25% finance costs deduction and 75% given as a basic rate tax reduction;
• from 2020/21, all financing costs incurred by a landlord will be given as a basic rate tax reduction.

These rules do not apply to residential properties held in companies

In addition rules may further restrict the relief which is due where the individual’s property income or total income is less than the amount on which basic rate relief is due. The computation is complex so please do get in touch if you would like us to review your position.

Internet link: GOV.UK guidance

HMRC have released more unusual excuses from taxpayers who failed to complete their self assessment tax return on time. These include:

1. ‘My tax return was on my yacht…which caught fire’
2. ‘A wasp in my car caused me to have an accident and my tax return, which was inside, was destroyed’
3. ‘My wife helps me with my tax return, but she had a headache for ten days’
4. ‘My dog ate my tax return…and all of the reminders’
5. ‘I couldn’t complete my tax return, because my husband left me and took our accountant with him. I am currently trying to find a new accountant’
6. ‘My child scribbled all over the tax return, so I wasn’t able to send it back’
7. ‘I work for myself, but a colleague borrowed my tax return to photocopy it and lost it’
8. ‘My husband told me the deadline was the 31 March’
9. ‘My internet connection failed’
10. ‘The postman doesn’t deliver to my house’

With the self assessment submission deadline of 31 January now past and an automatic penalty of £100 for failing to submit your return on time, please contact us if you need help bringing your affairs up to date.

Internet link: GOV.UK news