The changes announced last Autumn to certain businesses using the flat rate VAT scheme come into effect this month.

What were the changes and how may they affect you?

Businesses using the flat rate vat scheme pay over a lower rate of vat calculated only on their gross sales figures – the rate they pay varies according to the industry but was generally between 13.5% and 14.5%.

From 1 April 2017 these businesses must also determine whether they meet the definition of a “LIMITED COST TRADER” – and if they do the rate at which they pay over VAT is being amended to 16.5%.

A Limited Cost Trader is defined as one whose VAT inclusive expenditure on GOODS is either:

• Less than 2% of their VAT inclusive turnover in a prescribed period ( which we think will be a vat quarter)
• Greater than 2% but less than £1000 per annum

GOODS, for this test, must be exclusively used for the business, but exclude:

• Capital expenditure
• Food and drink for consumption by the business or its employees
• Vehicles, vehicle parts and fuel

So the majority of contractors, and most business providing a service, will be caught by these rules, as the amounts of goods that you actually buy are very small.  Computer software is a service, as are phone bills etc.

The Maths

If you are currently on a flat rate of 14.5%:

Sales invoice to client £10000 plus vat means you receive £12000 from your client.

VAT paid over to HMRC is 14.5% x £12000 = £1740.  Your net cashflow benefit is £260 (£208 after corporation tax)

Under the new rules, 16.5% will be paid over = £1,980 – a benefit of £20 (£16 after corporation tax)

So if your turnover is below the VAT registration threshold, you really need to ask whether it’s worth it any more, and consider deregistering.

If you spend money on services, and these services have VAT charged on them, you will probably be better off changing to the normal VAT rules, and reclaiming the input tax on services.  You need to weigh up against this the fact that submitting your VAT return may be more complicated each quarter and you need to make sure your accounting records are up the job!

My clients are deregistering if possible, but where their turnover is over the threshold, most are moving to the normal vat rules to enable them to reclaim any input tax that they have incurred.    If you do change methods, you do need to write to HMRC and let them know.

Which way have you decided to go?

The new tax year arrives on April 6 and with it the new tax rates and bands.  So how will your income be taxed in the 17/18 tax year.

The Personal Allowance for 17/18 will be £11,500.  This is the amount of income you can earn before you start paying tax.

The basic rate threshold has increased to £33,500, and the tax rate remains at 20%.  So on the next £33,500 of income, after the £11,500, you will pay tax at 20%.

The higher rate threshold remains at £150,000, and income falling in this bracket will be taxed at 40%.

Savers also benefit from the Personal Savings Allowance.  This means that on the first £1,000 of savings income (eg bank interest) you will not pay any tax if you are a basic rate tax payer, and on the first £500 of bank interest for a higher rate taxpayer.  (Yes, I know – bank interest, what’s that?)

For limited company owners, and those who owns shares, the dividend allowance for this year remains the same at £5,000.  The reduction to £2,000 announced in the Budget comes into effect from 18/19.  That means the first £5,000 you receive in dividends in the year is tax free.  After that you will pay at 7.5% for a basic rate taxpayer and 32.5% for a higher rate taxpayer.

Then there’s National Insurance to think about.  The thresholds for NI are different to those for income tax (obviously!)

For a sole trader, for 17/18 you will still pay class 2 NIC and class 4 NIC.

Class 2 NIC is a flat rate of £2.85 per week and is collected once a year when you submit your tax return.  If your profits are less than £6,025 then you will be exempt from paying class 2.  The exemption is automatic – it does not need to be claimed.

Class 4 NIC is payable on your profits.  You will pay class 4 NIC on profits over £8,164 and up to £45,000 at a rate of 9%.  Over £45,000 the rate is reduced to 2%.

This means that if your profit for 17/18 is between £8,164 and £11,000, you won’t pay income tax but you will pay National Insurance.

For employees, including directors of limited companies, you pay class 1 NIC on your salary.  For a director, you only pay NIC once your salary for the year is over £8,164; hence this being the rate at which may directors chose to pay themselves! Over this amount the rate of class 1 NIC is 12%.  The company will also pay class 1 NIC at a rate of 13.8% on salary over this level.

So – so much for tax simplification!  This blog covers the main tax bands for the year, but there are other exceptions etc and rates for certain types of income that are not covered here.

For more information or help please contact Rosie Forsyth.