Submitted by Sestini & Co
| on Thu, 12/01/2016 - 14:59 | In Budget
As announced in the Autumn Statement 2016, the government plans to introduce a new rate of 16.5% to the flat rate scheme, to prevent perceived abuse of the scheme by small businesses with a low cost-base. This is 2% higher than the current highest rate.
It is not yet clear which businesses this will apply to, beyond the wording in the Statement that this will apply to “businesses with limited costs, such as many labour-only businesses”.
Our feeling is that the new guidance appears to be primarily aimed at IR35-type consulting businesses but might encompass others depending on what proportion of their costs relate to the purchase of goods. We will keep a close watch and update clients as legislation and consultation progresses.
Buried in Table 2.1 of the Statement is the information that this measure is predicted to raise an additional £195m for the government coffers in 2017-18 alone.
Draft legislation: 5th December
Guidance released on the day of the Autumn Statement provides a little more clarity, and draft legislation will be published on 5th December and businesses and other stakeholders will have 8 weeks to comment.
Such ‘limited cost traders’ will likely be those whose VAT inclusive expenditure on goods is either:
- Less than 2% of their VAT inclusive turnover in a prescribed accounting period
- Greater than 2% of their VAT inclusive turnover but less than £1000 per annum if the prescribed accounting period is one year (if it is not one year, the figure is the relevant proportion of £1000)
There are certain exemptions to expenditure which can be attributed, such as food and drink for consumption by the flat rate business or its employees.
HMRC plans to introduce an “easy-to-use” online tool to help with the calculations.
How the current flat rate scheme works
Currently the flat rate scheme applies to businesses with a VAT turnover of £150,000 or less. To join the scheme, businesses must apply to HMRC and use the VAT flat rate applicable to their business. This ranges from a low of 4% for retailing food, confectionery, tobacco, newspapers or children’s clothing, to a high of 14.5% for sectors including accountancy, architect, computer and IT consultancy, lawyer/legal services.
The benefit of the scheme for small businesses is that the administrative burden involved with the VAT calculations is far less than with the standard annual accounting scheme or cash accounting scheme. As with the other schemes, quarterly VAT returns and payments are required.
Businesses on the flat rate scheme bill their clients at the usual 20% VAT and pay VAT at the rate applicable to their sector, e.g. 14.5% on the amount billed to the client (including VAT). As the HMRC guidance example demonstrates:
1. You bill a client for £1,000, adding VAT at 20% to make £1,200 in total.
2. You’re an IT consultant, so the VAT flat rate for your business is 14.5%.
3. Your flat rate payment will be 14.5% of £1,200 or £174.
4. You keep the difference between the amount charged to your clients and paid to HMRC.
When in the flat rate scheme for the first year, companies enjoy a 1% reduction on their VAT flat rate.
If you’d like to discuss any aspects of this with us, call us on 01761 241 861 or email us today. We will be pleased to advise you or to invite you into our offices in Paulton, near Bristol and Bath, for a consultation.