The VAT Flat Rate Scheme was introduced over a decade ago to make paying VAT easier for small businesses by removing the complex need for record keeping.
However, from 1st April this year, the government is setting the Flat Rate at 16.5 per cent for all limited costs traders. These are businesses which predominantly charge for a service that they provide rather than selling products. This will squeeze the tax relief for a variety of small businesses that currently enjoy lower rates depending on the nature of the services they provide.
In the 2016 Autumn Statement, Chancellor Philip Hammond announced the changes to the Flat Rate Scheme which will affect those businesses with a very low cost base. These businesses will now be called ‘limited cost traders’.
The current rates depend on business type and can vary from as little as 6.5 per cent for the farming industry through to a standard 14.5 per cent for firms such as IT consultants or bookkeepers.
The Flat Rate Scheme was originally designed to give low-overhead micro companies some tax relief, but the government is concerned that bigger firms are manipulating their accounts to make it look as if they have a turnover below the £150,000 threshold so as to qualify for the scheme.
Who will be Affected?
The Flat Rate Scheme can still be used, but the percentage will be increased to 16.5 per cent for limited cost traders.
If your business is currently on the Flat Rate Scheme and you are unsure as to whether you will be affected, the government has stated that before the changes come into play, it will introduce a simple online test and calculator to enable current and future users of the scheme to work out whether they need to change to the new rate.
It is estimated, however, that approximately 4,000 businesses will be better off by switching to the standard form of VAT accounting.
If you are baffled by whether the latest changes will affect you and what the best course of action might be for your particular business, why not discuss the matter with your local bookkeepers? They’ll be armed with all the answers you need and will no doubt have solutions to make sure you are saving as much as possible where any form of tax is concerned.