The VAT flat rate scheme has been popular with many small businesses but may become less so due to a change that HMRC intend to make from 1 April 2017, according to Garbutt and Elliott, a northern based accountancy firm.
Currently there are 54 flat rate percentages ranging from 4% to 14.5% (depending on the business sector) for businesses that use the scheme apply to their gross turnover to work out how much VAT to pay to HMRC.
HMRC intends to introduce another percentage of 16.5% from 1 April 2017 for businesses that incur relatively low costs on goods. In general terms this means businesses that have VAT inclusive expenditure on goods that is either less than 2% of their VAT inclusive turnover or is less than £250 per quarter (£1,000 per annum).
These businesses will either need to use the new 16.5% flat rate when calculating their VAT liabilities or notify HMRC that they have decided to cease using the flat rate scheme.
Important points to note when calculating the VAT inclusive value of goods purchased for meeting the 2% of VAT inclusive turnover or £250 per quarter tests are:
- Any goods not used exclusively for the business must be excluded
- The value of vehicles and other capital items is excluded
- The value of food and drink purchased for consumption by owner(s)/employee(s) is excluded
- Except for businesses providing transport services (e.g. couriers and taxi businesses) the value of vehicle parts and fuel are excluded
If, after excluding the value of the above items, expenditure on goods is less than 2% of VAT inclusive turnover or £250 per quarter the new 16.5% flat rate will apply from 1 April 2017. If a VAT period straddles 1 April 2017 the new rate will apply to the relevant proportion of the VAT period.
In the light of this information it would seem prudent for IIM members to compare the amount of VAT that would have been due had the 16.5% rate been introduced say 6-12 months ago with the amount of VAT that would have been due for the same period had the business used standard VAT accounting.
If less VAT is due using standard VAT accounting it will be appropriate to consider notifying HMRC that the business wants to leave the flat rate scheme.
The example below illustrates the effect of the change on Imogen the interim.
Before 1 April 2017
When Imogen prepared her VAT Return for the quarter to 31 December 2016 she had VAT inclusive income of £36,000 (£30,000 fees + £6,000 VAT) and had incurred VAT on costs of £100.
If Imogen used standard VAT accounting she would have paid HMRC £5,900 (£6,000 – £100).
If Imogen used the flat rate scheme she would have paid HMRC £5,220 (£36,000 x 14.5%) a saving of £680 (£5,900 – £5,220) compared to standard VAT accounting.
From 1 April 2017
If Imogen’s VAT inclusive income for the VAT quarter to 30 June 2017 is £36,000 she would need to pay HMRC £5,940 (£36,000 x 16.5%) if she continued to use the flat rate scheme.
Imogen has decided to leave the flat rate scheme and she has notified HMRC accordingly.
Of course, for some businesses it may be possible to defer or avoid the negative impact of the new flat rate scheme percentage by carefully planning when goods for business purposes are purchased.