If you are a small business owner who uses the VAT Flat Rate Scheme, new changes to the amount of VAT you will need to pay are heading your way.
Who will it affect?
If you are a goods based business and spend a reasonable amount on goods including raw materials then you shouldn’t be worried, because these new rules don’t apply to all. The bad news is, if you are a small business that that spends relatively little on goods, you could be in for a nasty surprise.
Service based businesses are going to be in the firing line, think accountants, hairdressers, IT consultants and even detectives. These businesses will now be termed as ‘Limited Cost Traders’ and are categorised as spending less than 2% of its sales on goods in an accounting period. You will also be listed as a Limited Cost Trader if you spend under £1,000 on goods (even if this is over 2% of your turnover).
Remember that the rules are strict on what counts as goods and what cannot be included in your total for the year. Business equipment, food and drink if not for resale, as well as vehicles or parts for your vehicles are some key examples of what cannot be included.
What is changing?
Under the Flat Rate Scheme, the government were concerned that some small businesses were using the system to avoid paying a fair rate of VAT. These changes will mean that Limited Cost Traders will now pay a percentage of 16.5%.
Here is an example of what the changes could look like:
If an IT consultant carries out £240 of work, including £40 of VAT, under the Flat Rate Scheme, they will pay £39.60 (£240 x 16.5%) which on smaller bills seem minimal, but remember by the end of the year it all adds up.
When will the changes take affect?
The official start date is 1st April 2017, but from now onwards certain invoices raised and goods purchased could be included, so make sure you read the official HMRC guide.
The rules around the VAT changes to the Flat Rate Scheme are extensive and the above is just a brief guide. For more information ensure you read sections 8.2 and 9.7 of the newly updated HMRC leaflet on the Flat Rate Scheme.