VAT FLAT RATE CHANGES April 2017
30th November 2016
VAT FLAT RATE
In the Autumn Statement, Chancellor Philip Hammond announced changes which affect businesses which have a very low cost base. These businesses are now called "limited cost traders".
Limited cost traders can still use the Flat Rate Scheme, but their percentage will be 16.5%. So, if they sell £120 of work, including £20 of VAT, the flat rate amount is £19.80 (£120 x 16.5%).
A limited cost trader is defined as one that spends less than 2% of its sales on goods (not services) in an accounting period.
When working out the amount spent on goods, it cannot include purchases of:
capital goods (such as new equipment used in a business)
food and drink (such as lunches for staff)
vehicles or parts for vehicles (unless running a vehicle hiring business)
A firm will also be a limited cost trader if it spends less than £1,000 a year, even if this is more than 2% of the firm's turnover on goods.
The 2% is for goods not services so your accountant’s fee doesn’t apply nor will your Cloud accounting software as this is called Software as a Service (SaaS) or any software that HMRC may think you’ll need to buy for Making Tax Digital.
The 2% is for each accounting period; we expect this means a VAT quarter. So, you cannot go out and made a large purchase of goods once a year.
It excludes capital expenditure but these days most laptops, phones etc. would not be capitalised.
Who will this affect?
It will increase the VAT paid by labour-intensive businesses where very little is spent on goods. For example, this may affect IT contractors, consultants, hairdressers and accountancy firms.
It will also affect construction workers who supply their labour, but where the raw materials are provided by the main contractor.
When does this start?
The new rules start on 1 April 2017, but may also affect invoices issued, and goods bought, from now on.
The scheme can be more complicated than expected, and this note is only an overview.
The financial impact
Let’s have a look at the figures.
A typical contractor on £70,000 net turnover a year (£84,000 including VAT) will collect £14,000 of VAT on behalf of HMRC and pay over £12,180 in VAT to HMRC.
That’s a profit of £1,820 which is the benefit of the using the simplified VAT Flat Rate scheme as the contractor does not have to record all of their purchases.
Bear in mind that the £1,820 is subject to corporation tax (currently 20%).
So, after all the taxes that’s £1,456.
If the contractor spends less than £1680 (Vat inclusive) on goods (not services) in a year (spread over the VAT accounting periods) then the Flat Rate percentage bumps up to 16.5%.
So, that means the contractor will still collect £14,000 of VAT on behalf of HMRC but pay over £13,860 in VAT to HMRC giving a difference of just £140 (£112 after corporation tax).
Best advice may be to deregister
Contractors with a turnover more than the VAT registration threshold who fail the limited cost trader test must switch to standard VAT accounting and suffer the additional administration that the systems impose by recording all VAT input tax on purchases and loss of the Flat Rate profit.
If the contractor has high outlays for services, then it may be beneficial to switch to the standard VAT accounting scheme and file a VAT return each quarter accounting for the VAT input tax in purchases.
Contractors who fail the limited cost trader test and whose turnover is below the VAT registration limit may want to just deregister for VAT to avoid the admin of standard VAT accounting for miniscule benefit.
Not Tax Simplification
The limited cost trader test will need to be performed each quarter and the correct flat rate applied. So, that’s another thing for businesses to remember to do and more tax rules for them to remember.