VAT Might Be More Expensive For Small Businesses In 2017
And what to do if it is ...
The Chancellor's Autumn Statement contained detailed proposals that may increase the amount of VAT that small businesses pay from April 2017 ...
If you're part of the VAT Flat Rate Scheme then you may find your VAT bill grows considerably!
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The change is to the VAT Flat Rate Scheme (FRS). The FRS was introduced as a way of helping small businesses to simplify their VAT reporting requirements - but it can also be used as a way of keeping more VAT and effectively making a profit from the Taxman.
"However, the change is a bit draconian!"
The proposed changes aren't yet law, and the proposal is that they will be included in the spring budget and apply from 1st April 2017. They will affect every business that use the VAT Flat Rate Scheme, but which spend less than 2% of their sales on goods, including raw materials, such as firms providing services.
Therefore, this can be seen as an attack on people who are day-rate subcontractors as well as on labour-only builders or plumbers. But why is this change needed?
Well, clearly, some people will say it is not needed. The Flat Rate Scheme is designed to give the Government roughly the same amount of VAT that it would get normally, but in a way that should be much easier to work out for the business involved.
However, because it is an approximation and uses fixed percentages, some businesses will pay more VAT than they might otherwise and, of course, some will pay less.
Typically, the sort of business that would pay less is one that provides services, not goods. The Government is clearly concerned that some firms are using the Flat Rate Scheme to pay much less VAT than they might otherwise. However, rather than gently massage the fixed percentages, they are going to bring in a sledgehammer to crack this particular nut.
"So what's changing?"
In brief, the Taxman's proposal is to introduce a new flat rate of 16.5% that would apply to any business not spending more than 2% of its income on goods. Note, this means goods and not services. Those businesses are going to be categorised as 'limited cost' traders.
This will impact a business that was, for example, a day-rate subcontractor, a labour only plumber, nurse, accountant, solicitor, or indeed any business that provides a service, not goods.
Limited cost traders can still use the Flat Rate Scheme, but their percentage will be 16.5%, which means they will pay a lot more VAT! Just to reiterate my main point: 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 classed as 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.
"What will it cost you?"
To explain the impact, please note the following example comparing someone whose flat rate is currently 12% with the proposed 16.5% rate:
As you can see this new flat rate is very expensive and, in the example above, would cost the business £540 more than the current rules!
"Does this affect you?"
If you are a limited cost trader and this change affects you then you need to review your situation. Whether you decide to stay in the Flat Rate Scheme or not is your decision.
Importantly, there is an alternative, which is to account for VAT on the traditional or standard basis of the difference between the VAT on your sales and the VAT on your purchases.
If you intend to leave the FRS then you need to write to HMRC to inform them of your leaving date. The Taxman will write back and confirm your leaving date.
If you are going to take action to leave the Flat Rate Scheme at the end of March 2017, then you need to be aware of two important points.
If you are on the FRS and receive payment or issue an invoice before 1st April that relates to work or you are going to do so after 31st March, then the Taxman says you have to account for this as if the invoice or payment was dated 1st April.
Similarly, if you invoice or receive payment for a job that spans the period the rules change then you have to allocate part of this to the period of the old rules and part to the new rules.
As ever, watch the small print. The Flat Rate Scheme can be more complicated than expected and this is just a blog post. For more than an overview of the changes, be sure to read the Taxman's guidance carefully or call me on 0333 335 0422 and ask us for help.
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.