Are You On The Flat Rate Scheme For VAT?
You might not want to stay on it ...
The Flat Rate Scheme For VAT is changing with the introduction of the concept of a 'low cost trader'. FRS is a way of simplifying the calculation of VAT for small businesses ...
If you're on the Flat Rate Scheme For VAT, you may not want to stay on it!
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But actually it was possible for some companies to make a profit from the tax man by being on it! So, like a lot of things, what was introduced by the taxman has been changed to withdraw some of the advantages.
"The simplification part is still there, but the ability to make a profit from it has been removed!"
In fact, going forward, many small businesses are likely to find it better to be on standard accounting for VAT rather than the Flat Rate Scheme For VAT. The change has been to introduce the concept of a 'low cost trader'.
Broadly speaking, a low cost trader is someone who doesn't spend much money on buying stuff for their business. But specifically, a low cost trader is one that spends less than 2% of its VAT inclusive turnover or £1,000pa, whichever is the greater, on 'goods'. Goods are obviously not services!
They are also items that are used exclusively for the business and it excludes items of capital expenditure, food or drink, vehicles, vehicle parts and fuel - unless the business is a transport services business.
All of which means that some business that are supplying professional services rather than physical products, are unlikely to qualify and become low cost traders.
If you are caught by this definition of a low cost trader then the flat rate that applies to your business is 16.5%. Whereas on the old FRS it might have been 12% or 14%. The important point is to review your circumstances and what this means for you.
For example, if you are a low cost trader who supplies professional services, then the new rules will mean that you move from a VAT flat rate of 14.5% to 16.5%, which means that you get to keep 0.167% of the VAT inclusive amount you charge, which isn't much!
Well, what can you do to deal with this? You have three choices:
Stay on the Flat Rate Scheme For VAT because it is convenient and ignore the likely loss you will make
De-register for VAT, if appropriate because you are under the VAT registration threshold
Stop operating on the FRS and change to standard VAT accounting
For most of our clients, we are advising them to switch to using standard VAT accounting.
Standard VAT accounting is where you track the VAT on your sales and on your purchases, work out the difference and then that is the amount you owe to the VAT man. Incidentally, this gives relief to small purchases, whereas the flat rate scheme only gives relief to larger purchases.
The Flat Rate Scheme For VAT makes the calculations simple, whereas you need to carry out proper bookkeeping to be able to operate the standard scheme. However, the taxman's 'making tax digital' proposals require businesses to track all of your income and expenditure properly anyway.
So in the future, there will be no advantage whatever to be gained from not doing your bookkeeping each week or month. And in the fullness of time, you will be required to do a mini tax return on a quarterly basis.
"You might as well get
used to it now!"
If you need help with reviewing your VAT affairs, or in changing your VAT registration to come off the Flat Rate Scheme for VAT, then please get in touch with me on 0333 335 0422 or click here to send me an email enquiry and I'll be in touch as soon as I can.
Until next time ...
I've been an accountant in and for business since 1987 and have a wide experience of consultancy, audit, accounts, taxation and wealth planning work from individuals and small businesses to multinational corporations and charities.
My eclectic interests in growing and developing business span a number of areas … and can be summarised as strategic business advice and tax saving advice.
I have worked with the Chamber of Commerce to deliver courses for people about starting up in business and have lectured about tax for a major accountancy practice and for Milton Keynes College.
I relax by reading fiction and by getting away from the office in a campervan.