Changes to the Flat Rate VAT Scheme explained by Martin Copland of Ashdown Hurrey

Martin Copland of Ashdown Hurrey
Martin Copland of Ashdown Hurrey

Question - I run a small business from home providing consultancy services to a couple of different businesses.

I am VAT registered and use the Flat Rate Scheme, which means that my quarterly VAT returns are relatively straightforward to complete. I have heard that the Flat Rate Scheme is changing and I would like to know how this will affect me.

Answer

The Flat Rate VAT Scheme can be used by small businesses to simplify the reporting and payment of VAT. Instead of the usual procedure of working out VAT, a flat rate is applied to gross sales for each quarter. The percentage used is based on the trade sector that the business falls in to. The rates used can vary from 4% up to 14.5%.

In his Autumn Statement, the Chancellor announced a change to the Flat Rate Scheme from 1 April 2017. A new rate of 16.5% will be introduced and will be applied to businesses that fall in to the category of ‘limited cost traders’.

Limited cost traders are defined as businesses that spend less than 2% or less than £1,000 per year on goods. In addition, there is a restriction on what are described as goods for the purposes of this test so that capital expenditure, motor expenses and some other items are excluded.

The test is performed each quarter and if the result is that a business is a limited cost trader they should apply the 16.5% rate for that quarter rather than their normal rate.

In practice, this means that you may be paying VAT at this new rate. As the new rate is applied to the gross sales, then it is possible that 99% of the VAT that you charge would be payable back to HMRC each quarter.

You should consider if the new rate is likely to apply to you. If it does then you may be better off changing to the standard VAT method, under which you can claim VAT on your vatable expenses.

Another option may be to deregister for VAT to avoid dealing with the administration of completing VAT returns every quarter, although you could only do this if your current turnover is under the deregistration limit (currently £81,000).

Advice

The Flat Rate VAT Scheme was introduced to simplify VAT for small businesses, but does contain a number of anomalies that could catch you out if you are not aware of the rules. These new rules add another layer of complexity and it is always a good idea to take advice to ensure that you are dealing with things correctly.

If you would like to discuss your circumstances in greater detail, Ashdown Hurrey can advise on this matter in addition to other tax, accountancy and business matters. Contact Martin Copland on 01424 720222 or email him at martinc@ashdownhurrey.co.uk.