Flat Rate VAT Changes

A new VAT flat rate of 16.5% will apply from 1st April 2017 to limited cost traders. For businesses affected by these changes it will mean an increase in the VAT payable from 1st April 2017. You will continue to charge your customers 20% VAT on your sales but you will have to pay over VAT based on the new 16.5% rate.

How does the flat rate scheme work?

The amount of VAT you pay or claim back from HM Revenue & Customs (HMRC) is usually the difference between the VAT you charge to customers and the VAT you pay on your purchases. With the flat rate scheme, you pay a fixed rate of VAT to HMRC and get to keep the difference between what you charge your customers and pay to HMRC. The percentage applied depends on your business and is supposed to result in the same amount of VAT payable by the business had the standard regime been in place.

What are the changes?

• From 1st April 2017, if you are classed as a limited cost trader, you will need to replace your existing flat rate percentage with the new higher 16.5% rate.
• A limited cost trader is a business that spends less than 2% of its sales (or less than £1,000 in total) on goods.  
• Goods do not include costs for services and excludes payments for capital items, food and drink and costs of relating to cars such as fuel and repairs (except where the business is one that carries out transport services – for example a taxi business).
• New avoidance rules will prevent a business defined as a limited cost trader from continuing to use a lower flat rate beyond 1st April 2017. This will affect a business that supplies a service on or after 1 April 2017 but either issues an invoice or receives a payment for that supply before 1st April 2017.

 

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Will the change affect me?

The change will affect businesses which are labour intensive and provide services which do not incur significant costs for goods. The most likely affected sectors include consultants, hairdressers, beauticians, cleaners, solicitors, labour only construction (CIS) and solicitors.

HMRC have produced an online tool to help determine status which can be found here.

To use the tool you’ll need some basic information – use the information that relates to your most recent VAT return period. If you submit quarterly returns this will cover a 3 month period. If you submit annual returns this will cover a full year. You’ll need to know:

• your relevant turnover
• the cost of goods

We can help you determine if you are affected by the changes.

How will this work in practice?

Example of how FRS works before the changes
Amount billed to customer £1,000 plus VAT at 20% = £1,200
Amount due to HMRC (14.5% rate) £1,200 x 14.5% = £174
VAT retained by trader £200 - £174 = £26

Example of how FRS works after the changes
Amount billed to customer £1,000 plus VAT at 20% = £1,200
Amount due to HMRC (new 16.5% rate) £1,200 x 16.5% = £198
VAT retained by trader £200 - £198 = £2

What action should I take?

HMRC’s initial guidance was issued in December and, following a consultation process, they have now provided further guidance. If you are caught by the changes, it may be better for you to change to the normal basis of accounting for VAT. Equally, for very small traders, with turnover below the VAT de-registration threshold, it may be appropriate to deregister from VAT altogether.

Please do call us on 0141 632 1863 for further information or contact us here.

Date published 1 Mar 2017

This article is intended to inform rather than advise and is based on legislation and practice at the time. Taxpayer’s circumstances do vary and if you feel that the information provided is beneficial it is important that you contact us before implementation. If you take, or do not take action as a result of reading this article, before receiving our written endorsement, we will accept no responsibility for any financial loss incurred.