From 1 April 2017 there will be changes to the way the flat rate scheme operates for some traders, namely those with limited costs such as consultants.
Under the standard VAT Scheme a business deducts the VAT on what they buy (VAT Input) from the VAT on what they sell (VAT Output), under the Flat Rate Scheme this process is simplified and a set % is applies to Gross sales and this amount is paid to HMRC without the need to calculate the VAT you have paid on your goods and services.
However in the Autumn Statement this process has had a shake-up. The ‘Limited cost trader’ who is registered for VAT under the flat rate scheme will be required to use a set flat rate % of 16.5% from 1 April 2017.
Does this apply to me?
Each quarter you will need to check your spending, if your expenditure on goods is less than 2% of gross sales or less than £250 then you will need to apply the 16.5% rather than the flat rate % you have previously been applying.
Note – in calculating your 2% of goods you cannot include capital goods, food and drink, vehicles or parts for vehicles, road fuel, and services (such as rent, telephone and internet charges)
However you can included supplies of gas and electricity if used exclusively for business
What will this mean to me?
- As you need to review your spending each quarter this removes the simplicity aspect of the flat rate scheme
- You will need to pay HMRC 16.5% of your gross sales
- You will lose the cash advantage of using the flat rate scheme as you will be calculating the VAT due based on 16.5% of your gross sales which will calculate to a similar amount to the VAT that you have charged (20%)
- If you are voluntary registered and your turnover is less than £81,000 you may want to consider deregistering for VAT, if you are now not receiving a cash benefit of the flat rate scheme – the admin costs of processing the quarterly VAT returns may make being VAT registered as cost rather than saving you money.
- If you decide to remain VAT registered and revert to the standard scheme so you can reclaim VAT on your expenditure you must write to HMRC to confirm your leaving date, once you have left the scheme you cannot re-join for 12 months:
HM Revenue and Customs
77 Victoria Street
The regulations are currently in draft format and we expect to hear a lot more on this subject before this comes into effect. But it is something to think about now as this will be in effect in just three months time!
If you want to help to understand this, just give us a call 01273 739592 or email firstname.lastname@example.org