Changes to the VAT flat rate scheme

Holybrook Associates_4421b_resizeThe flat rate scheme is changing, which will affect many small businesses on turnovers of less than £230,000.  Here Rachel Eden, our coordinating director, discusses what this might mean and what you should do if your business if affected.

If you’re a small business registered on the flat rate scheme you’re likely to have had a letter about the changes to the flat rate scheme.

The main impact is that there’s a new category that the government has created called a ‘low-cost trader’.  If this sounds like it might not affect you, check again as it may do even if you have substantial costs, including VATable costs.

The government has defined this as any business which is spending less than 2% of their turnover (or less than £250 a quarter if that is higher) on certain VATable goods.

It’s important to check carefully whether you do spend more than 2% of your turnover on the right categories of goods: services don’t count and there are some very specific rules. For example, software that you buy on a CD counts as a good, but many people now use downloaded software or subscriptions to cloud-based software and this doesn’t.  However software that has been design bespoke to your business doesn’t count as a good even if it is delivered on a CD.

In addition if you are investing in your business by purchasing capital equipment, for example, a computer, furniture, printer or mobile phone these don’t count either.  This applies even if you aren’t treating them as capital expenditure in your accounts.

If you have to move over to this category it will mean that the business could have to pay several thousand pounds more a year over in VAT, as the deemed rate will be 16.5% instead of rates of between for example 4 and 14.5%

The intention is described by the government as to ‘tackle aggressive abuse of the flat rate scheme’ but the impact is that it will disproportionately affect businesses that spend more of their turnover on services and on employment, and could distort incentives.

As a business on the flat rate scheme, it’s important to check your position so that you are correct from the start of April and it may also be worth considering moving off the flat rate scheme to the more complex standard scheme to ensure you can reclaim the VAT you are paying.

I’d recommend if in any doubt discussing with your bookkeeper or accountant and HMRC has guidance here.  If you are Holy Brook client do get in touch.

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