Flat Rate VAT Changes Will Hit Small Businesses Hard
How will it affect you?
What are the changes?
HMRC have announced significant flat-rate VAT changes for the amount of VAT that many small businesses will have to pay, with effect from 1 April 2017. Small businesses will suffer as part of a government crackdown on big businesses manipulating their accounts in order to pay less tax. The flat-rate VAT scheme was introduced over a decade ago to make life easier for small businesses – with a standard rate of 14.5% payable to HMRC. Although, the current flat rates vary depending on the type of business you have, and can be as little as 6.5%.
From 1 April 2017, the rate is being increased to a uniform flat-rate of 16.5% for all limited cost traders. Limited cost traders are businesses which have a very low cost base. Businesses that predominantly charge for service rather than selling products.
What do these changes mean for your business?
For labour-intensive businesses where very little is spent on goods (limited cost traders) enrolled in the flat-rate VAT scheme, this mean they will pay more tax. It may affect businesses such as IT contractors, consultants, hairdressers, accountancy firms and builders. For business who currently pay the lowest level or flat-rate tax, this new hike is going to be more considerable.
A contractor charges a customer £1,000 for their service plus £200 VAT. Currently, the contractor on a flat rate of 12.5% would keep £50 of the VAT they received. But from 1 April 2017, they will only keep £2.
What do you need to do now?
Before the law changes in April, if you are part of the flat-rate VAT scheme, you need to establish whether you need to use the new rate. For an estimated 4,000 businesses, it will be cheaper to switch to standard VAT accounting. Businesses supplying a service taking place on or after 1 April 2017 are not allowed to issue an invoice or take payment in advance using the lower rate.
If you would like to discuss the flat rate VAT changes, need help to find out whether you need to use the new rate or if you should switch to standard VAT accounting, please contact our VAT expert, Peter Bowyer today.