How the flat rate VAT changes will impact small business and contractors
In this blog I will be looking at changes announced in the recent Autumn statement by Chancellor Philip Hammond to reduce the benefits of registering for Flat Rate VAT for some small companies. After reading this blog you should understand if these changes will affect your business, how they will change your decision to be VAT registered or not and what if anything can be done about it.
As always if the things discussed in this blog effect you or you want more information regarding your personal circumstances, please feel free to e-mail me at firstname.lastname@example.org and I would be happy to help.
From the 1st April 2017, a new VAT flat rate of 16.5% is being introduced. This is much higher than most current rates and it is particularly targeted at what the chancellor is calling ‘limited cost’ business. These are defined at business where goods purchased (inclusive of VAT) in the VAT period are less than 2% of turnover or less than £1,000 per annum.
At the time of writing we are still waiting for clarification from the government what is included in the definition of goods, but we know it defiantly excludes things like capital expenditure, food, vehicles, and fuel purchased by the business. Also by not extending the term to ‘goods and services,’ it will most likely mean services such as your accountancy bill may also be excluded.
How will it affect my business?
If you are a contractor or maybe even a small business where you work from home, you may be affected by these new changes.
The impact will depend on your exact circumstances but if we take an example of an IT service provider who works from home and has limited expenses allowed under the new scheme. For arguments sake let’s say they have a turnover of £85,000 before VAT and allowable expenses of £1000. Currently they would be on a VAT flat rate of 14.5% (13.5% in the first year). That would mean this trader would have annual turnover of £102,000 (£85,000 at the standard rate of 20%) and would pay over VAT at £14,790 (£102,000 at 14.5%). If we also take into account the standard rated expenses of £1,000 with VAT of £167 included in them, this trader has made a ‘profit’ of 2,043 a year by being on the flat rate scheme.
From the 1st April when the rules change this trader would be paying VAT at 16.5% or £16,830. This is only £170 different from the £17,000 which you would be paying under the standard scheme of adding 20% to sales. This is a negligible benefit once things like accountancy fees and the lost reclaimable expenses are considered.
The main reason this new change is so punitive is that the 16.5% on the flat rate scheme is calculated on gross turnover whereas the 20% on standard rated VAT is calculated on net turnover. A flat rate of 16.67% would give you the same figure of VAT on outputs as the normal standard rated VAT scheme.
What can be done about it?
Until further guidance is released by HMRC on what counts towards the 2% of goods there is little to do at this current moment in time. It will be more important than ever to record expenses correctly and to keep business expenses separate to ensure that there is no private usage.
You should be speaking to your accountant as they will be able to advise whether you should deregister for VAT or not. If you are going to deregister it would be prudent to do this in April and date the deregistration from the end of March to make sure you are not caught out. It should also benoted that there is anti-avoidance legislation in place to stop you front loading your invoicing i.e. dating your invoices 31st of March when the work really takes place in April.
Another option is to join the standard VAT scheme, you would be paying over all VAT on Turnover but you will be able to reclaim VAT on services such as your accountancy bill. This may be beneficial to you, and may be the only option if your turnover is over the VAT threshold. Again you should speak to your accountant or tax adviser first as they will know your current circumstances best and be able to advise what is best for you.Type your paragraph here.