From April 2017, HMRC has announced significant changes for the amount of VAT that many small businesses will have to pay in UK. This will affect vast majority of businesses that use the VAT Flat Rate Scheme but spend very little on goods, including raw materials such as companies providing services to their clients. The aim of the new rate of 16.5 % is supposedly to tackle aggressive abuse of the scheme by labour-only agency workers.
What is VAT Flat Rate Scheme?
The amount of VAT a business pays or claims back from HMRC is usually the difference between the VAT charged by the business to customers ( known as output VAT ) and the VAT the business pays on their own purchases ( known as input VAT).
Example: Let’s say for instance your business is an advertising agency and sold in the last quarter £36,000 (£30,000 + VAT £6,000) and your business had total expenses of £2,400 (£2,000 + VAT £400).
To calculate your VAT Return:
VAT Return = Output VAT (-) Input Vat = £6,000 – £400,.00
Your total VAT return was £5,600
With the VAT Flat Rate Scheme:
- You pay a fixed rate of VAT to HMRC. There is a list down on this page
- You keep the difference between what you charge your customers and pay to HMRC
- You can’t reclaim the VAT on your purchases, except certain capital assets over £2,000.
To join the scheme your VAT turnover must be £150,000 or less (excluding VAT) and you must apply for VAT.
In this case, the advertising agency enrolled in the VAT Flat Rate Scheme would pay 11 %.
VAT Return = 11 % x £36,000 = £3,960
In this case, your business would be better off in £ 1,640 (£5,600 – £3,960).
The VAT Flat Rate Scheme simplifies business record keeping, and makes very easy to calculate the VAT they have to pay.
In my point of view, this proposed changes are the most important element of the Autumn Statement for businesses registered for VAT in UK.
What is changing?
Chancellor Philip Hammond announced changes which affect business which have a very low cost base. These businesses are now called limited cost traders.
Limited cost traders can still use the Flat Rate Scheme, but their percentage will be 16.5 %.
So in our example, the advertising agency would now pay £ 5,940 = £ 36,000 x 16.5 % which would be worse off £1,980 (£3,960 – £5,940)
A limited cost trader is defined as one that satisfy two conditions:
- Spends less than 2% of its sales on goods (not services) in an accounting period;
- Spends less than £1,000 a year even if this is more than 2% of the firm turnover on goods.
Let me give you an example:
Let’s say for instance the advertising agency for the VAT quarter ending 30 June 2017, had gross sales of £10,000 including VAT. His VAT Inclusive spending on qualifying goods for the same period was £240, 00. The business must adopt the 16.5% rate and pay £1,650 of VAT if the £240 spending on goods is:
Less than 2% of sales (£10,000 in my example)
Less than £1,000 a year i.e. £250, 00 per quarter
Conclusion: The total goods figure of £240, 00 including VAT passes the first conditions but not the second one. So, the 16.5 % rate must be adopted.
HMRC announced that there will be a new online tool that will enable current businesses to determine whether they must use the new rate.
We have identified that the biggest spending of service businesses on relevant goods will be on stationery items. This is partly because road fuel, motor parts, food, drink and capital items are excluded from the definition of relevant goods.
A possibility would be to spend 2% of the total gross sales each quarter on buying stationery.
Print cartridges are the best bet because they cost more and take up less space than envelopes and paper.
You can also buy a lot of expensive technical books.
Software is classed as goods if you buy a package off the shelf but it is a service if it is downloaded from the internet.
To include road fuel and motor parts in the calculation for relevant goods a business must be using the Flat rate scheme category for transport or storage including courier, freight, removals and taxis. For all the other scheme users, these costs are excluded.
Please, remember that you can also deregister from the VAT Flate Rate Scheme any time.
If you have any question, please call us at: 020 7328 8338 and speak to our VAT department.
VAT flat rates
The VAT flat rate you use depends on your business type. If the rate changes, you must apply the new rate from the date it changes.
If you’re in your first year as a VAT-registered business, reduce the VAT flat rate by 1%. The reduced rate lasts until the day before your registration anniversary.
|Type of business||Current VAT flat rate (%)|
|Accountancy or book-keeping||14.5|
|Any other activity not listed elsewhere||12|
|Architect, civil and structural engineer or surveyor||14.5|
|Boarding or care of animals||12|
|Business services not listed elsewhere||12|
|Catering services including restaurants and takeaways||12.5|
|Computer and IT consultancy or data processing||14.5|
|Computer repair services||10.5|
|Entertainment or journalism||12.5|
|Estate agency or property management services||12|
|Farming or agriculture not listed elsewhere||6.5|
|Film, radio, television or video production||13|
|Forestry or fishing||10.5|
|General building or construction services*||9.5|
|Hairdressing or other beauty treatment services||13|
|Hiring or renting goods||9.5|
|Hotel or accommodation||10.5|
|Investigation or security||12|
|Labour-only building or construction services*||14.5|
|Laundry or dry-cleaning services||12|
|Lawyer or legal services||14.5|
|Library, archive, museum or other cultural activity||9.5|
|Manufacturing fabricated metal products||10.5|
|Manufacturing not listed elsewhere||9.5|
|Manufacturing yarn, textiles or clothing||9|
|Mining or quarrying||10|
|Real estate activity not listed elsewhere||14|
|Repairing personal or household goods||10|
|Retailing food, confectionery, tobacco, newspapers or children’s clothing||4|
|Retailing pharmaceuticals, medical goods, cosmetics or toiletries||8|
|Retailing not listed elsewhere||7.5|
|Retailing vehicles or fuel||6.5|
|Sport or recreation||8.5|
|Transport or storage, including couriers, freight, removals and taxis||10|
|Wholesaling agricultural products||8|
|Wholesaling not listed elsewhere||8.5|
*‘Labour-only building or construction services’ means building services where the value of the materials supplied is less than 10% of the turnover for those services. If more than this amount, the business is classed as ‘General building or construction services’.