Flat rate VAT scheme changes background
Flat rate VAT scheme changes came into effect on the 1st April 2017. HMRC have now completed their consultation phase. Below are what the changes may mean for you and the type of business affected.
For eligible businesses, the Flat Rate VAT Scheme is a simplified method to work out their VAT liability by applying a fixed percentage. Under the flat rate VAT scheme method, any VAT reclaimable is restricted. If you are an I.T. contractor your VAT liability is calculated by multiplying your turnover by 14.5% e.g. total sales including VAT £12,000 x 14.5% = £1740.
The restriction does not include the purchase of capital goods such as new equipment, food and drink, and vehicles, parts of vehicles or other capital equipment greater than £2000.
The standard rated method involves calculating the VAT liability based on VAT charged on sales less VAT incurred on purchases. E.g. you have sales of £12,000 including VAT and you have paid £6,000 including Vat in expenses. Your Vat liability will be £2,000 less £1,000 = £1,000.
The flat rate VAT scheme was essentially a great perk for those businesses that had a very small amount of purchases and input VAT.
So what are the Flat rate VAT scheme changes from April 2017
Those businesses with a very low-cost base will be affected most by the Flat rate VAT scheme changes. These businesses are classified as “Limited cost traders” if either of the following applies.
- less than 2 % of their VAT inclusive turnover on goods in an accounting period; or
- more than 2% of their VAT inclusive turnover but less than £1000 a year.
HMRC do not recognise the following as goods
- any services – which is anything that isn’t goods
- expenses like travel and accommodation
- food and drink eaten by yourself or your employee(s)
- vehicle costs including fuel unless you are in the transport business using your own, or a leased vehicle
- rent, internet, phone bills and accountancy fees
- gifts, promotional items and donations
- goods you will resell or hire out unless this is your main business activity
- training and memberships
- capital items for example office equipment, laptops, mobile phones and tablets
The flat rate VAT scheme changes mean all “limited cost traders” now have to apply a rate of 16.5% to calculate their VAT payable. Previously the % used to calculate your VAT payable would depend on the nature of your business. E.g. I.T. contractors would apply 14.5% to calculate their VAT payable. You still get 1% off the 16.5% in your first year of being part of the flat rate scheme.
HMRC have a tool that you can use to work out how the flat rate Vat scheme changes affect your business YOU CAN FIND IT HERE
Who is affected?
The flat rate VAT scheme changes increase the VAT bill of labour-intensive businesses that spend little on goods.
Examples of the kind of businesses that are likely affected are IT contractors, consultants and construction workers. These businesses tend to supply their labour but are not responsible for purchasing the raw materials.
Legislation was published on 23 November 2016. To prevent businesses from issuing invoices or receiving payments prior to 1 April 2017 for services provided post 1 April. Effectively, any such supply will be deemed to have taken place on 1 April 2017 and therefore subject (if applicable) to the new flat rate VAT scheme percentage of 16.5%.
Should you deregister for VAT?
You only have the choice to do this if you are below the VAT threshold. If your turnover is above the threshold then consider the additional costs of having to keep proper VAT records. Is the additional cost more than the 2% increase in VAT payable due to the flat rate VAT scheme changes?
The choice on whether to remain on the Flat Rate Scheme or move to a Standard VAT Scheme will be unique to each individual business circumstances depending on their capital expenditure. We recommend speaking to your accountant before making a decision.
Finance Equation Ltd are award winning Chartered Certified Accountants. Contact us via email or call 020 3086 7472 to see how we can make a difference to your business.
