vat small business pointers

Flat Rate VAT changes for small business

 

INVOICE/CASH ACCOUNTING

FLAT RATE

REGISTRATION & RECORD KEEPING

INVOICE/CASH ACCOUNTING

FLAT RATE

REGISTRATION & RECORD KEEPING

       Services

61 Friar Gate  Derby  DE1 1DJ

 

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Changes were announced in the 2016 Autumn Statement to the amount of VAT that many small businesses will have to pay.  This will affect businesses that use the VAT Flat Rate Scheme but which spend very little on raw materials - such as firms providing services.

How does it work? - Normally a business deducts the VAT on its inputs from the VAT charged on what they sell. Under the Flat Rate Scheme, that two stage process is simplified to one step.

The percentages for each type of business vary.  The flat rate scheme is designed to give the government roughly the same amount of VAT, but is easier to work out.  Because it is an approximation, some businesses will pay more, and some less. The government is concerned that some businesses are using the Flat Rate Scheme to pay less VAT than is appropriate.

What is changing? - In the Autumn Statement the Chancellor 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%.

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). 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 than 2% of the firm's turnover on goods.

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 and hairdressers.

When does this start? - The new rules start on 1 April 2017.

  • Examples - from 14.5% to 16.5%

    At its most basic, the change in legislation means that any business enrolled onto the scheme will see a two per cent increase in VAT payable from 01 April 2017.

    Below are some scenarios where a business has chosen to enrol onto the new scheme, or has chosen to opt out. Those who do opt out will of course be subject to the standard VAT regime of 20 per cent of net turnover.

    Example A
    Limited cost trader under current FRS £12,000 (gross turnover) X 14.5% = £1,740 VAT payable
    Limited cost trader under new FRS £12,000 (gross turnover) X 16.5% = £1,980 VAT payable
    Standard VAT regime £10,000 (net turnover) X 20% = £2,000 VAT payable
    Example B
    Limited cost trader under current FRS £24,000 (gross turnover) X 14.5% = £3,480 VAT payable
    Limited cost trader under new FRS £24,000 (gross turnover) X 16.5% = £3,960 VAT payable
    Standard VAT regime £20,000 (net turnover) X 20% = £4,000 VAT payable

    In both Example A and B, the VAT payable between the new scheme (16.5 per cent) and the standard VAT regime (20 per cent) is relatively small, especially when compared to the current scheme (14.5 per cent).

    The difference is that those on the FRS cannot claim on VAT incurred by your business when buying goods*. These businesses would instead keep the 3.5 per cent difference (the difference between the FRS and the standard regime) and use this to offset their VAT costs.

    This would be £20 in example A and £40 in example B under the new scheme (16.5 per cent), or £260 and £520 respectively under the current scheme (14.5 per cent).

    Businesses that purchase relatively few goods may still benefit from using the FRS.

    (*FRS-enrolled businesses will still maintain the right to claim on input tax on individual purchases of capital goods with a VAT-inclusive price of £2,000 or more.)

    Calculation to demonstrate how the changes are likely to impact on a typical limited company contractor earning £100,000 per year.

     

    Example: VAT FRS before April 2017:

    Contractor's annual turnover before VAT 100,000
    VAT charged at 20% 20,000 20,000
    Total revenue: 120,000
    Flat rate paid over to HMRC 14.50% -17,400 -17,400
    Leaving in company: 102,600
    VAT on costs that could otherwise be claimed: (if VAT registered but not in FRS) 1,500 20% -300
    Net benefit of using FRS 2,300

    Example: VAT FRS after April 2017:

    Contractor's turnover before VAT 100,000
    VAT charged at 20% 20,000 20,000
    Total revenue: 120,000
    Flat rate paid over to HMRC 16.50% -19,800 -19,800
    100,200
    VAT on costs that could otherwise be claimed: (if VAT registered but not in FRS) 1,500 20% -300
    Net cost of using FRS -100

    The most suitable approach will depend on your current spend on VATable goods.

     

    If you are uncertain how the FRS change will affect your business, or you would like further information on any of the points discussed please contact us.

Registered to carry out audit work by the Association of Chartered Certified Accountants - auditregister.org.uk 8011438

61 Friar Gate  Derby  DE1 1DJ

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