The devil’s always in the detail.
Mr Hammond said yesterday that he was going to shut down “inappropriate use” of the Flat Rate VAT scheme – but that’s not quite what he meant. The planned changes will affect most service industries using the scheme.
Currently businesses determine which rate to use based on their industry sector. This is generally between 13.5% and 14.5%.
From 1 April 2017 they must also determine whether they meet the definition of a “LIMITED COST TRADER” – and if they do they are being forced to use a new rate of 16.5%.
A Limited Cost Trader will be 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.
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 have a high outlay on services which have VAT charged on them, you may be better off changing to the normal VAT rules, and reclaiming the input tax on services.
Which ever way you go – it’s one more thing to think about and one more attack on the small business!
For further information and help, please contact me.