TLC doesn’t love changes to flat rate VAT from 1 April 2017
10th March 2017
Last year, the Chancellor announced changes to the Flat Rate VAT scheme, which will be implemented on 1 April 2017.
For many service-based businesses, it’s highly likely that the days of making a substantial saving out of the Flat Rate Scheme are over.
If your VAT quarter ends in April it’s urgent you read, understand and make a decision on this issue, then let us know by 10 April so we can do the work we need to support you. If your VAT quarter ends in May or June we would still appreciate knowing your decision by 1 May 2017 so we can prepare.
So what are the changes?
If you fall into the new definition of a limited cost business, the VAT flat rate percentage at which you should pay HMRC will rise to 16.5%, regardless of your current rate.
To not be treated as a limited cost business, you must show:
– You have spent more than 2% of your flat rate turnover each VAT quarter on “relevant goods”, and
– The spend is more than £250 each VAT quarter
What are these “relevant goods”?
Stationery is the main expense which is allowed, so if you purchase your year’s supply of ink for printers all in one quarter, this could be enough to qualify to stay at your current flat rate for that quarter. Other possible expenses are technical books and software bought off the shelf (it becomes classed as a service if it’s downloaded online). Gas and electricity is also included if it is used exclusively for your business (so for business premises, not your home).
Expenses that you can’t include:
– Capital goods such as new office equipment (mobile phones, laptops etc.)
– Travel, accommodation, food and drink
– Mobile phone bills
– Vehicles, fuel, or parts of vehicles unless you run a vehicle hiring business
– Services such as rent, accountancy fees, advertising, and hire of equipment
– Goods for disposal as promotional items, gifts or donations
– Goods for resale, leasing, letting or hiring out if your main business activity doesn’t ordinarily consist of selling, leasing, letting or hiring out such goods
– Goods that you intend to re-sell or hire out, unless selling or hiring is your main business activity
What do the changes mean in practice?
The Government has billed this as simplifying the record-keeping needed, but it will actually mean we have to do a new calculation each and every quarter to see whether you have bought sufficient relevant goods to qualify to stay on your existing rate for that quarter, or if we need to apply the 16.5% rate (this will be a big admin burden!)
What are your options?
It boils down to three things:
1. Stay in the Flat Rate Scheme and see how it works out for your business
2. Move to the standard way of paying VAT at 20% which means you can claim back the VAT on all VAT-able expenditure (including our fees), or
3. De-register altogether (as long as your turnover is below the threshold, currently £83,000)
We’re happy to have a quick chat on the phone about your circumstances to help you come to a quick decision, but if you need us to work out the detailed calculations for each scenario we do need to make a one-off charge of £150+VAT, as this will be outside our normal remit.
If you want to have a look at your situation based on your own numbers HMRC have released a calculator. We have also put together an example below which we hope will show you the impact of the options in practise.
Meet A Company…
A Company is currently on the 12% flat rate. On this rate, they make a saving of £56 per £1,000. If they were now to be classified as a limited cost trader this gain would reduce to £2 per £1,000 billed, as the 16.5% rate would have to be applied, meaning there is very little flat rate saving.
Option 1 – staying on the Flat Rate Scheme
Based on a gross turnover of £72,000 (£60,000 + VAT) a year (or £18,000 per quarter), A Company will need to spend at least £360 (2% of £18,000) per quarter on qualifying goods to be able to stay on its current 12% flat rate.
However, the gain made by still qualifying for the 12% is £3,360 a year, so even with an annual relevant goods spend of £1,440, you will still make a saving of £2,220 – under the new rules, you must spend money to save money (but at least there is a saving!)
Option 2 – move to the standard scheme
The impact of the standard scheme will depend on the expenses A Company incurs, but let’s make some assumptions.
A Company is a service business, as opposed to trading in goods. There are two directors, one who is the main person providing services, and they work from home.
Based on an estimated £6,000 of gross VAT-able expenses (£5,000 + VAT) each year, the amount of VAT A Company could reclaim is £1,000 a year. However, they would have to pay HMRC the full 20% of VAT on their sales invoices.
Using the turnover figures above, the VAT payable for the year would be £12,000, less the £1,000 reclaimable on expenses, so £11,000 in total.
If A Company stayed on the flat rate scheme, the VAT payable (at 12%) is £8,640 – although to qualify to stay on the flat rate scheme under the new rules it would have to spend £1,440 during the year on relevant expenditure.
So, based on these, figures A Company would be £920 better off staying on the Flat Rate scheme at its current percentage as opposed to going on to standard VAT scheme, if it is was prepared to do the calculations every quarter and spend the relevant amount on qualifying goods.
Slight drawbacks of the standard scheme
If moving to the standard rate sounds like a good option for your business, bear in mind there are some practical drawbacks of going on the standard VAT scheme:
– You’ll need to keep good expense records and reconcile them every quarter in time for filing the VAT return
– You’ll have to keep full VAT receipts showing the VAT-able amount of each purchase and VAT number of the retailer. If you’re already using Receipt Bank, you’re are ahead of the game!
If you think standard VAT is for you and you do your accounts on a spreadsheet then we really need to get you onto Xero – it will make your life easier. Without it you risk your spreadsheets becoming overcomplicated, leading to errors.
Being on the standard scheme does, however, avoid the complexities of recharging expenses to clients and working with VAT registered associates (these are common pitfalls of the Flat Rate Scheme).
Option 3 – De-register
This could be the simplest option for those under the VAT threshold. The only negative is the perception people have of you as you come across as a bigger business when you are VAT registered. Only you will know what your clients will think if you no longer charge them VAT.
You can only deregister for VAT if your gross turnover is less than £83,000 per annum including VAT.
So what do you need to do?
Unfortunately, there isn’t a one size fits all option.
If de-registering isn’t an option, you firstly need to look at your spending patterns, and whether you will be able to spend enough on relevant goods each quarter to be able to carry on using your current flat rate.
For some of you, whose Flat Rate Saving is marginal, you may be better off on the standard scheme. Note that that if you do come off the Flat Rate Scheme, you can’t re-join it for 12 months.
If your turnover is approaching the limit at which you would have to move onto the standard scheme anyway (£230,000 including VAT), then now might be a good time to make the move.
Remember, the changes come in on 1 April 2017 so it’s important you think about this now. If you want a chat about the options for you, do give one of us a call.
If you’ve decided you want to change your company’s VAT scheme get in touch and we can write to HMRC to confirm the change for you. If you want us to work out some figures based on your turnover we can do this for £150+VAT. As you can see, it’s not a straight-forward calculation.
Give us a call on 01937 534505 or drop us an email. We appreciate this is a big change but we are here to help!