If you use the VAT flat rate scheme or are considering using it you could get a nasty shock. New rules from 1st April could cost you several thousand pounds a year extra. And moving to the standard VAT scheme will still be expensive!

From 1 April, if your VAT inclusive costs on goods rather than services are less than 2% of your VAT inclusive sales in any VAT period, you must pay HMRC 16.5% of your VAT inclusive sales for each VAT period this applies. That’s instead of the flat rate percentage that normally would apply to your business. HMRC describes such businesses as “limited cost traders”, and yours could be one of them!

It Will Cost Joe £3,000 A Year More:

Joe White Ltd Computer Consultant

A typical year’s figures

Net VAT Type
£ £
Turnover (=Sales) 125,000 25,000
Stationery -200 -400 Goods
Hotels -500 -100 Services
Telephone -300 -60 Services
Accountancy -900 -180 Services
Software -800 -160 Services
Total Expenditure -2,700 -540
Flat rate percentage applicable to Joe’s business 14.50%
Payable to HMRC year before 1/4/17
Sales Net + VAT £150,000
Flat rate percentage payable to HMRC @ 14.5% £21,750
Payable to HMRC year after 1/4/17
VAT inclusive goods as percentage of VAT inclusive Sales 0.03%
Less than 2% so must pay HMRC 16.5% £24,750
Annual Cost to Joe of change in flat rate rules £3,000
Joe moves to standard VAT Scheme
VAT on Sales £25,000
VAT on Expenditure -£540
Total VAT payable for the year £24,460
Saving by moving to standard VAT scheme from new Flat Rate Scheme £290

Joe was paying £21,750 in VAT a year before the new rules, but will pay £24,750 after 1st April if he stays in the flat rate scheme as HMRC would designate him a limited cost trader

To reduce the extra VAT payment, Joe will have to come out of the flat rate scheme and use the standard VAT scheme, when he must pay HMRC £24,460 a year, and will still be £2,710 worse off than before 1st April.

Nine Things For You To Consider About VAT:

(for more details follow the link to HMRC’s website below)

  1. Take a look at your likely annual sales and expenditure from 1 April 2017 to see if you will be affected by the new rules. (Or look at figures for the last 12 months as a guide).
  2. Make a note of your total expected sales + VAT for the 12 months.
  3. Work out all your VAT inclusive expenditure on goods for the same period. Goods must be something you can touch and see. Typical “goods” would be stationery, or goods for resale. See how I’ve categorised Joe’s expenditure.
  4. Capital items must be ignored. So equipment bought to keep in the business to help you make money such as computers, furniture, or vehicles isn’t allowed to be classed as “goods” for this purpose.
  5. Food or drink costs for consumption in your business or by your employees must be ignored.
  6. Vehicles, parts of vehicles and fuel costs are not goods unless you are running a transport business such as a taxi service.
  7. Take the total VAT inclusive cost of the goods allowed under these rules and divide it by your total VAT inclusive sales for the same period. Multiply that figure by 100 to give you a percentage figure.
  8. If the percentage you calculate in any VAT period is less than 2% you must pay HMRC 16.5% of your total VAT inclusive sales rather than the lower flat rate percentage you would have used otherwise. That could cost you very dear. It will cost Joe (in the example above) £3,000 a year.
  9. Of course the calculation will vary quarterly, and if the percentage is 2% or higher (and more than £1,000 each year) you can use the percentage for your industry in that quarter. But you’ve got to keep on doing the calculation each quarter and it might not always work in your favour. That means it won’t be nearly so quick and easy to do your flat rate VAT return from 1st April.

There are rules to stop businesses invoicing in advance so that their first quarterly percentage is 2% or higher, so there’s no way round this. (See the link below)

Follow this link to HMRC’s website for more information: https://www.gov.uk/government/publications/tackling-aggressive-abuse-of-the-vat-flat-rate-scheme-technical-note You probably didn’t think of yourself as an aggressive abuser! – however, that’s where the limited cost trader details are shown.

Leave Flat Rate Scheme?

If your business spends very little on “goods” you should consider leaving the flat rate scheme and moving to the standard VAT scheme, where VAT incurred on expenditure is deducted from VAT charged on sales invoices each quarter. You will probably end up having to pay over more VAT than on the flat rate scheme under the old rules, but may be better off than under the new rules for the flat rate scheme.

Only you can decide what’s right for your business.

Standard VAT Scheme

If you decide you need to move to the standard VAT calculation in future, you may need some training on how to do data input correctly. That can be a minefield for some businesses. (It’s not obvious). You won’t be able to claim back VAT on all expenditure.

Many people will want to use the cash accounting option if they used that before with the flat rate scheme. Your bookkeeping will have to change from 1st April so you should start planning now for this. Don’t leave it until the last minute.

And if you decide to leave the flat rate scheme you must write to HMRC telling them so.

If you need some training on VAT or to get your bookkeeping up to date, call Frances on 01737 559211. We specialise in small business tax and accountancy

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