Changes to the “VAT Flat Rate Scheme” imminent – will you be out of pocket?
In last month’s Autumn Statement, Chancellor Philip Hammond announced changes to the VAT Flat Rate Scheme that will lead to a squeeze on finances for many small businesses.
How the current Flat Rate Scheme works depends on the sector your business is in. As things stand, if you use this scheme you can’t reclaim VAT incurred on any business purchases you make apart from expenditure on capital items (plant, machinery and vans etc.) costing £2,000 or more. To calculate how much VAT you have to pay over to HMRC, you multiply your gross turnover (including the VAT you have charged at normal rates) by the percentage that the taxman has set for your particular trade sector.
For example, accountancy and legal services firms pay 14.5%, estate agents pay 12% and journalists pay 12.5%.
The advantages are obvious. On the standard scheme, if your business is one that doesn’t buy much, it clearly can’t reclaim much input VAT. If your business is, say, an estate agency and you opt to use the flat rate scheme, although it adds VAT on bills to clients or customers at the normal 20% VAT rate, it only has to pay over say 12% to HMRC. As a result, your business can end up paying the taxman much less money than it would under the normal standard VAT arrangement.
Unfortunately, the Chancellor has now come to the conclusion that far that too many contractors and small businesses are abusing the Flat Rate Scheme. Which is more than a little ironic, given it was designed to help the self-same contractors and small business in the first place.
So, from April 2017, the existing rules are being abolished and a new 16.5% Flat Rate is being introduced for so-called ‘low cost traders’. These are contractors or businesses whose expenditure on goods (not services) is less than 2% of their gross turnover or, if more than that, totals no more than £1,000 in a year.
As 16.5% of gross turnover is equivalent to 19.8% of the net total, this means any cash advantage these businesses had under the original Flat Rate scheme is all but obliterated.
The rule changes will particularly affect businesses and contractors who incur a lot of VAT on buying services, such as software licences, telecoms, rent, IT support and the like.
So, if you are on the VAT Flat Rate scheme, what should you do next?
We strongly recommend you talk to one of our accountants to review your situation. Depending on your circumstances, you may be better off doing one of these things:
- Deregistering from VAT altogether by 1 April 2017 (if your turnover is under £83,000)
- Switching back to operating the standard rate VAT Scheme and recovering VAT on expenses
- Staying on the Flat Rate Scheme but bringing forward more of your purchases to this financial year.
So, there we have it. A scheme to help smaller enterprises is being changed so many of them will no longer enjoy any benefit from it! Whatever else you do, don’t stay part of the Flat Rate Scheme without talking it through with your accountant – give us a call today.