Do the flat rate Value Added Tax (VAT) changes affect you?

If you are a VAT registered individual or business using the Flat Rate Vat scheme, HM Revenue & Customs (HMRC) will have already contacted you regarding the changes to the scheme.

These changes were effective from 1 April 2017 and will see the majority of the flat rate saving being lost as well as a higher level of administration for businesses.

Whilst previously businesses under the Flat Rate VAT scheme benefited from a lower VAT percentage on their gross sales, HMRC have now introduced certain rules, which will increase the flat rate percentage to 16.5% for a lot of businesses.

The increased rate of 16.5% is being targeted towards businesses offering a service, rather than a sale of goods, or what HM Revenue & Customs are referring to as ‘limited cost traders’.  A limited cost trader will typically have minimal expenditure on goods and has one the following;

• Expenditure of less than £1,000 a year on goods. This does not include assets, insurance, subscriptions, travel or any other service expenditure.
• Expenditure of less than 2% of turnover on goods (including VAT).

As well as losing the flat rate savings associated with the flat rate scheme, HMRC are also expecting those on the flat rate scheme to complete a ‘test’ for every VAT Return prepared which reiterates the conditions above and will confirm whether to use the new rate of 16.5%. You can use the following calculator to see if you need to apply the 16.5% rate:

HMRC’s new flat rate test here

If you think your business is classified as a limited cost trader and you are above the VAT registration threshold, you may benefit from moving onto the standard rate VAT scheme. This change will mean VAT is payable to HMRC on net fees at 20%, but also enables you to claim back VAT on any expenses, if applicable.

Similarly, if you are below the VAT registration threshold of £83,000 you may wish to consider deregistering for VAT. However remember to check with your clients to ensure they are happy to deal with a business that is not Vat registered.

If you want to know more about how the Flat Rate VAT changes might affect your business, please contact us.  We also have a specialist contactor team who are always happy to help with your accounting and tax queries so get in touch today.