UHY Ross Brooke Chartered Accountants

VAT blow to small businesses

I can recall the introduction of the VAT Flat Rate Scheme in 2002, which was originally fanfared as a simplification measure for small businesses. After such a long time I don’t recall the exact rates but take up was minimal as the rates were set too high and there was no real incentive to join. After a number of years the rates were revised downwards and there was then a real financial reason for many businesses to sign up to the scheme, often resulting in a VAT bonus of several £000’s to the business.

But in a total about-face, and another hammer blow for small businesses still reeling from the new dividend tax, the Chancellor has announced plans to apply a new rate of 16.5% for any business described as having “limited costs” from 1 April 2017. As the rate is applied to the VAT inclusive value of supplies, it will force many businesses to reconsider whether its still worth being within the scheme.

For example, from 1 April 2017, a limited costs trader supplying goods for £100 will charge VAT at 20% of £20. The VAT then due to be paid to HMRC will be 16.5% of £120 (the VAT inclusive cost) resulting in a payment to HMRC of £19.80.

A limited costs business is one whose VAT inclusive expenditure is either:
• less than 2% of their VAT inclusive turnover in a prescribed accounting period
• greater than 2% of their VAT inclusive turnover but less than £1000 per annum if the prescribed accounting period is one year (if it is not one year, the figure is the relevant proportion of £1000)

Goods, for the purposes of this measure, must be used exclusively for the purpose of the business but exclude the following items:
• capital expenditure
• food or drink for consumption by the business or its employees
• vehicles, vehicle parts and fuel (except where the business is one that carries out transport services – for example a taxi business – and uses its own or a leased vehicle to carry out those services)

The proposals are not yet law, and secondary legislation will be published on 5 December, followed by a consultation period of 8 weeks. HMRC say that they will communicate with affected businesses before the due date.

If the rules do come into effect as proposed then businesses will need to consider whether its worthwhile staying in the scheme, bearing in the mind the extra admin costs if they revert to the standard scheme and need to calculate and record input VAT on each item of their expenditure.

Each business is different and we will be consulting with each of our clients on an individual basis.

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