Among other business taxation changes taking place from 1st April 2017, will be changes to the VAT Flat Rate Scheme (FRS), as detailed below.
About the VAT Flat Rate Scheme
The VAT Flat Rate Scheme makes it easier for small businesses to calculate the VAT they need to pay. Businesses can voluntarily register for VAT before their turnover reaches the £85,000 VAT registration threshold so they can make use of the flat rate scheme and have a cash advantage.
Whereas usually businesses deduct VAT on their purchases from what they sell, the flat rate scheme applies a fixed percentage of VAT (this rate is varied dependent upon the trade), and the businesses are allowed keep the difference between what they charge customers and what is payable to HMRC.
As an example, a Management Consultant on the flat rate scheme would currently have a fixed rate of 14%. If they invoice a client for £2,400 including VAT, they will pay HMRC £336 (£2,400 x 14%). Therefore, there is a saving of £64 (calculated by the £400 VAT collected from the invoice, deducting the payment to HMRC of £336).
Businesses eligible for the scheme must be VAT registered and have VAT turnover of no more than £150,000 in the period of 12 months after registration.
Those registered on the scheme may be able to reclaim VAT on capital items that cost £2,000 or more.
What is changing?
The changes taking place from 1st April 2017 will affect businesses with low cost bases – who will now be classed as ‘Limited cost traders’.
These businesses will still be able to use the Flat Rate Scheme, but their percentage will now be 16.5%. Using the above Management Consultant as an example with their invoice for £2,400 including VAT, with the new changes they would pay HMRC £396 (£2,400 x 16.5%). The saving in this example then reduces to £4 instead of £64 (comparable with above example).
A limited cost trader is one that:
Spends less than 2% of its sales on goods (not services) in an accounting period – this cannot include purchases of food and drink, vehicles or vehicle parts, or capital goods.
Spends less than £1,000 a year, even if this is more than 2% of the turnover on goods.
What are my options?
With these changes in mind, you may want to review your current VAT registration to decide what is best for you and your company. Here is a breakdown of the options available going forwards:
1. Stay on flat rate scheme
– Your first VAT period starting after the 1st April 2017 will have the new 16.5% applied. Nothing else will change, however the scheme will be less efficient than before.
– It is worth noting that if your businesses is within the first 12 months of VAT registration, the 1% discount on the flat rate for the first year still applies.
2. Switch to the standard VAT scheme
– All VAT collected is paid over to HMRC however you are able to deduct the VAT you have paid on your expenses).
– Not all expenses will have VAT that you can claim but examples include accountancy fees, computer equipment, mileage or fuel, accommodation and subsistence costs etc.
– If you decide to switch to the standard VAT scheme, you will need to write to HMRC and the first VAT quarter affected will be the first quarter to start after the 1st April 2017.
– There will be more admin work involved as you will need to keep VAT receipts and check that your bookkeeping reflects the correct VAT on expenses.
– If you choose to leave the flat rate scheme, you are not able to re-register for another 12 months.
3. Deregister from VAT
– If your turnover is below the deregistration threshold of £85,000.00, you are able to deregister from VAT and once deregistered, you will not need to submit quarterly VAT returns to HMRC.
The difference between staying on the flat rate scheme and switching to standard may only be marginal and is dependent on the amount of VAT you could claim on your expenses. If you do not have many expenses which include VAT, it may not be worth switching to the standard scheme due to the extra admin work involved.
If you would like any advice on the best option for your business, please do get in touch and one of our team would be happy to help. Tel. Cheltenham: 01242 504510, London: 0207 0962659, Leighton Buzzard: 01525 303984
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