VAT changes are no April Fool’s joke

by Richard Ashmore | Mar 14, 2017 | News

1^st April sees what could be a significant change to the flat rate VAT scheme. It’s targeting what are being termed ‘limited cost traders’ – businesses where purchases of ‘goods’ are low. These are likely to be sole director/employee businesses, and in particular contractors providing services.

Small businesses can currently benefit from the ability to base their VAT liability, and therefore the amount of VAT they reclaim on purchases, on a fixed percentage depending on the nature of their business.

For many very small businesses this has meant a really quick and simple way to handle VAT and has seen some paying over less VAT than would have been the case under standard VAT accounting.

Changes were first mooted in the Autumn Statement, and we have been waiting to see the details before knowing how it would affect businesses. These details were finally revealed at the end of February.

The flat rate scheme remains in place but from 1^st April a new higher rate (16.5%) is applicable to any business that is deemed to be a ‘limited cost trader’. The impact of this will be that for many the VAT flat rate scheme will no longer be beneficial.

You will be classed as a limited cost trader unless you have ‘goods’ in each VAT quarter of more than 2% of turnover (both calculated including VAT). You will also have to check each and every quarter whether this applies.

Goods are being defined as ‘moveable items or materials exclusively used in your business’. Critically for suppliers of services they do not include travel expenses, fuel, vehicle costs, telephone, rent, accountancy fees, training, memberships and also office equipment, computers and phones. This is not an exhaustive list, but you get the picture.

Clearly this excludes the vast majority of costs which many service businesses incur.

The options for a business caught by this change are:

1.      Continue with the flat rate scheme and apply the new higher percentage, which may not be beneficial

2.      If you are below the £83k VAT registration threshold then you could deregister for VAT

3.      Change over to standard accounting or cash accounting methods

The best option will vary on a business by business basis. If you are, or think you may be, affected by these changes, then please do get in touch, and we will be happy to talk it through with you.