VAT is changing, if you’re on the Flat Rate Scheme.
Briefly, this is an existing, simplified scheme for smaller VAT-registered businesses (up to £150,000 turnover) who don’t have many transactions – or not many types of transactions – to make it easier for them to maintain VAT-compliant records.
Instead of totting up each quarter what you’ve sold vs what you’ve bought, and calculating the VAT on the balance – bearing in mind you may have some transactions at differing rates of VAT – you can just take a flat percentage of the sales and pay that over.
This flat rate depends on what kind of business you are, and is lower than the standard rate of 20%. In other words, HMRC will receive (say) a flat rate 14% of your gross sales, instead of you calculating VAT on net sales at 20% then deducting VAT on net purchases at ranges of VAT between 0% and 20%.
Especially useful if you don’t use a computerised accounting system, or an accountant to do this for you each quarter!
NOTE: in this context, gross=including VAT, net=excluding VAT.
However, HMRC are now biting down on some businesses where they consider too little VAT is being paid overall – what they call “limited cost” businesses. This affects many consultants, whose reclaimed expenses are small, but their sales value is high.
HMRC realises that (say) 14% on gross sales might not come anywhere near 20% on net sales, and particularly if there wouldn’t have been many purchases to offset, under the standard VAT scheme. So they intend to restrict the rate for this kind of business.
From their announcement to businesses who may be affected:
From 1 April 2017 we’re introducing an additional flat rate of 16.5%. This rate will apply to businesses in any sector, but only if they have limited costs. The existing flat rates will continue to be available for those flat rate businesses that don’t qualify as a limited cost business.
What do I do next?
There’s a simple calculator available to help businesses work out whether they’re a limited cost business – go to GOV.UK and search for ‘Check your VAT Flat Rate’.
If you’re a limited cost business you’ll need to use the new rate from 1 April 2017.
Using the new rate may mean that you pay more VAT than you do now. You may wish to reconsider whether you still want to use the Flat Rate Scheme. If you’re trading below the VAT registration threshold, you may decide to deregister.
Where to find more information
VAT Notice 733 provides detailed guidance for Flat Rate Scheme users on GOV.UK.