Businesses that operate in the UK and have “taxable supplies” are only required by law to be VAT registered broadly if they turn over £83,000 per annum. This means that very small businesses do not need to be VAT registered, although they are entitled to do so on a voluntary basis should they wish to do so.
However, the government realise that operating within the VAT rules can be a burden, taking up the time of small business owners. This is particularly the case where the business chooses not to use an accountant and instead deals with their VAT affairs directly themselves.
For many years, businesses with an expected turnover of less than £150,000 have been able to simplify their VAT affairs by joining the VAT Flat Rate Scheme.
Don’t fall foul to new changes to the VAT Flat Rate Scheme
In the simplest form, traditionally
preparing a VAT return involves working out the VAT on sales, and VAT on all purchases and offsetting the two to calculate the amount due to HMRC. The Flat Rate Scheme avoids the need to do this and instead the business pays VAT on a fixed percentage of its VAT inclusive turnover.
Such businesses don’t need to account for the VAT on their purchases, but the percentage they pay to HMRC is reduced to reflect the VAT they incur on their costs.
This simplifies the VAT affairs of thousands of small businesses.
In some rare cases, this system resulted in businesses making ‘a profit’ on their VAT, charging VAT at 20% but perhaps only paying 16% to HMRC. This difference of 4% is meant to cover the VAT on purchases, however for many contractors working from home or at their customer’s premises they have minimal costs and even less VAT.
To counter this, in the Autumn Statement it was announced that “limited cost traders” would be charged a new higher rate under the Flat Rate Scheme. This higher rate effectively means that 19.8% of the 20% collected needs to be paid to HMRC.
This has been viewed as a harsh and aggressive move by the Government.
New VAT rates for Flat Rate Scheme
The new rates will affect businesses whose expenditure on goods is either:
- Less than 2% of the VAT inclusive turnover; or
- Greater than 2%, but less than £1,000 per annum
However, HMRC go on to confirm that for the purpose of these new rules, the following expenditure is ignored:
- Expenditure on services
- Capital expenditure (on equipment for example)
- Food and drink for consumption by the business or employees
- The cost of vehicles, vehicle parts or fuel.
The result is particularly harsh, especially for small businesses who use the services of accountants, lawyers or others. They may well be charged significantly more than 2% on such costs alone.
The likely result of these changes is that many businesses will no longer benefit from being within the Flat Rate Scheme, somewhat un-doing the simplification that the scheme looked to achieve.
Small businesses using the Flat Rate Scheme are encouraged to review their affairs in advance of the introduction of the rules from 1st April 2017.
For further advice please contact Wisteria’s tax team for a full review.