The Autumn Statement on 23 November announced some changes to the VAT Flat Rate Scheme that will hit many small businesses.
The Flat Rate Scheme allows businesses to calculate their VAT by multiplying their gross turnover (including VAT) by a percentage for their trade sector.
Typical rates used by our clients are:
Entertainment – 12.5%
Consultancy – 14.5%
Other business services – 12%
Photography – 11%
For example – a business classed as ‘other business services’ that currently invoices £50,000 plus VAT would pay over £60,000 x 12% = £7,200. In effect it has profited by £2,800 as it has received £10,000 in VAT and paid out just £7,200.
Under the new proposals a new rate of 16.5% will apply from 1 April 2017 to ‘low cost traders’
In the above example this would make the VAT now payable as £60,000 x 16.5% = £9,900. A saving of just £100.
What is a low cost trader?
This is defined as a business whose expenditure on goods is less than 2% of its gross turnover, or if more than 2% of its turnover, the amount spent on goods is less than £1,000 per year. It’s important to note that spending on services doesn’t count. The rules also exclude expenditure on capital items, motor expenses and food and drink.
Who is likely to be affected?
Consultancy businesses – many consultants do not spend the required amount on goods. Remember that services such as software, rent, professional fees etc don’t count towards the 2% expenditure on goods.
Actors and writers – the main expenditure incurred by many actors and writers is commission on their agents fees. This won’t count towards the 2% on goods. For actors and writers who engage agents then they may be best reverting to the standard method of paying HMRC the VAT invoiced less the VAT incurred. Actors and writers who don’t have agent’s commission to pay will be particularly hit hard by the changes.
Photographers – it isn’t clear from the guidelines issued so far whether goods will include zero rated items such as photobooks. If albums are included as goods then we’d expect most photographers not to be affect. (We would expect that albums should be included as goods but will need to see the full legislation when it is published.)
The new legislation only comes into effect on 1 April 2017 so no action needs to be taken now.
Draft legislation will be issued on 5 December for an 8 week consultation. During this period other issues (and opportunities) may arise.
Deregister for VAT – for businesses trading under the threshold (£83,000) it may no longer be appropriate to be VAT registered
Ease back on sales and deregister – for businesses just over the VAT threshold then life may be a lot easier by working a bit less and deregistering.
Leave the Flat Rate – this will add complexity and cost to preparing VAT returns. For businesses with little expenditure on goods they will be worse off.
Pay the 16.5% – you’ll be worse off than now but still enjoy the simplicity of the Flat Rate SCheme
We’ll keep you up to date with the changes as they develop and provide appropriate advice to our clients once all the facts are known.
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