Flat Rate VAT Changes

March 2017

A new VAT flat rate of 16.5% will apply from 1st April 2017 to limited cost traders. For businesses affected by these changes it will mean an increase in the VAT payable from 1st April 2017. You will continue to charge your customers 20% VAT on your sales but you will have to pay over VAT based on the new 16.5% rate.

How does the flat rate scheme work?

The amount of VAT you pay or claim back from HM Revenue & Customs (HMRC) is usually the difference between the VAT you charge to customers and the VAT you pay on your purchases. With the flat rate scheme, you pay a fixed rate of VAT to HMRC and get to keep the difference between what you charge your customers and pay to HMRC. The percentage applied depends on your business and is supposed to result in the same amount of VAT payable by the business had the standard regime been in place.

What are the changes?

 


To discuss how these changes may affect you call us today on 0800 0523 555 or submit an online enquiry here.

 

Will the change affect me?

The change will affect businesses which are labour intensive and provide services which do not incur significant costs for goods. The most likely affected sectors include consultants, hairdressers, beauticians, cleaners, solicitors, labour only construction (CIS) and solicitors.

HMRC have produced an online tool to help determine status which can be found here.

To use the tool you’ll need some basic information – use the information that relates to your most recent VAT return period. If you submit quarterly returns this will cover a 3 month period. If you submit annual returns this will cover a full year. You’ll need to know:

We can help you determine if you are affected by the changes.

How will this work in practice?

Example of how FRS works before the changes
Amount billed to customer £1,000 plus VAT at 20% = £1,200
Amount due to HMRC (14.5% rate) £1,200 x 14.5% = £174
VAT retained by trader £200 - £174 = £26

Example of how FRS works after the changes
Amount billed to customer £1,000 plus VAT at 20% = £1,200
Amount due to HMRC (new 16.5% rate) £1,200 x 16.5% = £198
VAT retained by trader £200 - £198 = £2

What action should I take?

HMRC’s initial guidance was issued in December and, following a consultation process, they have now provided further guidance. If you are caught by the changes, it may be better for you to change to the normal basis of accounting for VAT. Equally, for very small traders, with turnover below the VAT de-registration threshold, it may be appropriate to deregister from VAT altogether.

Please do call us on 0800 0523 555 for further information or contact us here.