VAT Flat Rate Scheme change

Martin suggested the VAT Flat Rate Scheme changes would be a good idea for the educational slot this week, and I always follow legal advice!!

And following Martin’s ‘sandwich’ example of a few weeks ago, I will first-of-all tell you what I intend to tell you; Then tell you; and finally tell you what I told you!

And so, to what I intend to tell you: Those on the VAT Flat Rate Scheme are stuffed! (That’s the technical term of course!)

Now for the meat in the sandwich, so to speak:

VAT Flat Rate Scheme changes took place from 1st April this year.

The change was brought in as it was thought the VAT Flat Rate Scheme was being abused by a number of micro businesses on the scheme; although I’m sure by no one in this room!

The change will affect a lot of contractors, freelancers and small businesses.

Those affected are those deemed to be Limited Cost Traders.

HMRC guidance states that a ‘Limited Cost Trader is one whose VAT inclusive expenditure on goods is either less than 2% of their VAT inclusive turnover, or greater than 2% of their VAT inclusive turnover, but less than £1000 per year.

If a VAT period is for a quarter then £250 would be the relevant figure. It is therefore possible to be a Limited Cost Trader in one quarter, but not in the next!

Goods, are those excluding Capital expenditure, Accountancy fees, Leased items, Adverts, Food or drink, software from the internet and, in most cases, Motor expenses, must be exclusively for the purposes of the business.

Motor expenses where the business is a transport service are allowed to be included in the calculation of expenditure on goods, as are Stationery, Gas & Electric, Cleaning products, Software purchased on a disc, and Stock for a shop.

The additional VAT payable, for example, by a small trader previously described as ‘Business services not listed elsewhere’ at 12% on £120,000 VAT inclusive turnover will be an extra £ 5,400.
(Calculated: Now £120,000 @ 16.5% = £19,800
Previously £120,000 @ 12% = £14,400)

So what are the solutions:
1)    If your turnover (excluding VAT) is under £83,000 you could de-register for VAT.
2)    See if you can meet the ‘Goods rules’ and therefore avoid being a Limited Cost Trader, in some quarters if not in all of them.
3)    Just pay the higher rate duty, on the basis that you may well have been gaining an advantage to date, and this rate more truly reflects a fair calculation, or,
4)    Apply to leave the Flat rate scheme and pay and deduct VAT at the standard rates.

and finally tell you what I told you: Those on the VAT Flat Rate Scheme are stuffed!

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