Are you currently using the flat rate VAT scheme? Or perhaps you’re about to hit the VAT threshold and thinking about which scheme to use?
From the 1st of April 2017, we’ll be seeing some BIG changes to the flat rate VAT scheme. We’re here to break down what’s changing and what you need to do about it.
Just what exactly is the Flat Rate VAT Scheme?
The flat rate VAT scheme was introduced by HMRC in an effort to reduce the administrative burden of VAT registered businesses.
Essentially it means that you pay a flat percentage of VAT on your sales, usually calculated on broad trade sector information. This percentage is substantially lower than the standard VAT rate of 20%. However, choosing flat rate VAT means you can’t reclaim the VAT on your purchases.
In essence, this should lessen the burden of VAT reporting. Some businesses will also find themselves paying less VAT to HMRC than they would have on the standard VAT scheme.
So, why change it?
We mentioned that some businesses find themselves paying less in VAT – and this is really getting on HMRC’s nerves. They emphasise that the flat rate scheme was only ever intended to be a simplification scheme, and never a tax allowance.
Last year alone, HMRC reported an additional 30,000 applications for FRS, with the majority of these applications coming in bulk from ‘unscrupulous employment agencies’. HMRC allege that these agencies have been moving workers from umbrella companies into individual companies eligible for FRS in order to reap the cash benefit.
In fact, countless independent advisers have been marketing FRS as a route to cash benefit, rather than as a way to simplify VAT reporting.
HMRC have decided that this abuse of the scheme is unfair to those ineligible for FRS. The upcoming changes to FRS are their reaction and, in theory, solution to those trying to cheat the system.
Going forward, traders classed as ‘limited cost businesses’ will no longer pay FRS VAT at a percentage based on their trade sector. From the 1st April, they’ll pay VAT at 16.5%.
You might be wondering what a ‘limited costs business’ is. Don’t worry, we did too!
According to HMRC, you are a limited cost trader if your VAT inclusive expenditure on goods is:
– Below 2% of your VAT inclusive turnover or
– More than 2% of your VAT inclusive turnover but less than £250 per quarter (or £1000 per year)
You can use HMRC’s new calculation tool to help you figure out if you’ll be affected by the changes to flat rate.
You may also be wondering just what they mean by ‘goods’. In essence, you can include tangible purchases for resale or use within the business. But don’t confuse ‘goods’ with your cost of sales! Even if you’re reselling software, you can’t count the software you’ve purchases as ‘goods’. It’s still counted as a service. So HMRC won’t accept that this counts towards your expenditure on ‘goods’.
HMRC have also excluded countless items from the scheme, to ensure the measures taken to prevent abuse are ‘robust’. Check what is and what isn’t included in their definition of goods here.
Some major concerns have been raised over the changes. Both from accounting professionals and small business owners. The main concern is just what exactly you’re supposed to do if you’re VAT quarter straddles the 1st April 2017 when the changes come into place.
Well, firstly you’ll need to check if you’re a limited cost business. If you are, you’ll need to move from your previous flat rate scheme percentage to 16.5% as of the 1st of April. This will mean completing calculations to submit the pre 1st April part of your VAT return at the old rate, and the post 1st April part of your VAT return at the new rate. Sounds like fun, right?
And I’m sure those of you using accounting software to calculate and submit your flat rate scheme VAT will be particularly worried just now. Well, fear no more! HMRC have a solution for you – journal as per the calculations you’ve used to solve the problem…
This is also an issue for businesses who will sit on the 2% threshold, moving in and out of the range of the new scheme. For those businesses who may be under the threshold in one period, and over it in the next, HMRC have advised that you keep checking to make sure you’re reporting VAT correctly. So much for minimising the administrative burden!
Of course, they have said that those in this position wishing to minimise their administrative costs can just report at the higher 16.5% to save time…
You may be one of the lucky ones unaffected by these new measures. Businesses with a generally high level of goods purchases should be safe – including café’s, shops etc. If you are affected, you can make the decision to leave the scheme. If you’re under the VAT Threshold turnover (£85,000 from 1Apr), you can choose to deregister from VAT completely. But if you leave the flat rate scheme, you won’t be able to re-join it for the next 12 months. It’s a big decision!
If you’re a business owner on the flat rate scheme, we’d strongly recommend you get in touch with your bookkeeper. Give them a call this month and get a plan in place in advance of the changes.