In the November 2016 Autumn statement chancellor Phillip Hammond made a brief announcement that the government would crack down on the abuse of the flat rate VAT scheme. Most national newspapers reporting the next day made little or no mention of this as it sounded too niche for general reading. However, many small businesses are on the flat rate scheme and really should sit up and pay attention to this one!
What is Flat Rate VAT?
The flat rate VAT scheme is a simplified version of VAT reporting for businesses under a certain turnover limit. Instead of calculating your “ins and outs” and paying to HMRC the difference, businesses can simply pay over a percentage of their gross turnover each quarter. The percentage is defined by your business type. Most management consultants (and this category includes employment law, health and safety, advertising consultants and a whole host of other types of consultants) are on a 14% rate. So if you invoice your client £100 plus 20% vat, you pay to HMRC 14% of £120 which is £16.80. You’ve therefore charged your client £20 but only paid £16.80 on every £100 billed. Of course, it means you can’t claim back any VAT on purchases unless it’s for capital assets over £2,000.
Most consultants have very few costs that they incur VAT on (perhaps just their mobile phone bills and their accountants’ bill) as generally there is no VAT on their travel costs. They therefore are far better off on the flat rate scheme than the standard scheme.
So what are the new rules?
Because the percentage is an approximation, some businesses win and some lose. Very few companies or traders choose the flat rate scheme for the easier admin if it will cost them more. The government are targeting so called “low cost traders” who may be paying less than appropriate.
Low cost traders are defined as those businesses that spend less than 2% of their turnover on goods (not services) in their accounting period. As the definition says “the spend on goods”, the accountants fee for example, does not count towards this 2% as it is a service. Also not included are capital goods such as new computer equipment, food and drink and vehicles and vehicle parts (unless it is a vehicle hiring business). Anyone spending less than £1,000 per year is automatically a low cost trader even if this is more than 2% of their turnover.
These low cost traders will be given a new higher percentage rate of 16.5%.
Who will it affect?
The increased percentage will hit labour intensive businesses the hardest, where very little is spent on goods. This includes, among others, IT contractors, consultants, mobile hairdressers and even some accountants. It could also affect construction contractors who supply their labour but where the materials are provided by the main contractor.
When does it start?
The new rate applies from 1st April 2017. There are also rules (called anti-forestalling) to prevent businesses affected from billing customers early in March instead of April to avoid the new higher rate.
What to do if you think you are affected.
If you think you will be caught by this rule change, you should review whether the flat rate VAT scheme is still right for your business. Make sure you talk it through with your accountant soon in order to ensure you are using the correct method from April 2017.
If you know of any businesses that may be affected by the flat rate VAT changes ensure they are also aware of these implementations. Champ Consultants are always happy to accept new clients and pride ourselves on our proactive service.
Latest posts by Matthew Baker (see all)
- Budget Autumn 2017 - 28th November 2017
- Flat Rate VAT for Consultants and Contractors - 12th December 2016
- Qualified Accounts Senior position available at Champ Consultants - 22nd March 2016