Posted: February 8, 2017
Article written by Greg Mayne, Director of Indirect Tax and VAT
We have had a number of enquiries from clients currently operating the VAT Flat Rate Scheme who are concerned about the imminent changes to the scheme. As a quick reminder the Flat Rate Scheme allows smaller businesses (those with annual turnover of less than £150,000) to pay to HMRC a percentage of their income, rather than the ‘normal’ VAT charged on their supplies – this percentage being lower than the standard rate of VAT (20%).
In the Autumn Statement, the Chancellor announced that for those businesses that did not purchase sufficient quantities of goods (where that value is less than 2% of the VAT inclusive turnover figure, or if more than 2%, less than £1,000 per annum) the relevant Flat Rate percentage would increase to 16.5%. These businesses are categorised as ‘limited cost’ businesses. Clients operating in the consultancy, design and labour-only sectors would be caught by this change (which will be implemented from 1 April 2017) and have been asking about how to mitigate this.
In short, there appears to be little room for manoeuvre available – the proposed hike in the rate equates to a relative VAT rate of 19.8% which makes the scheme unattractive to businesses that are unable to recover VAT on any day to day expenditure (the Scheme only allows recovery on capital purchases in excess of £2,000). The alternative to the Flat Rate Scheme is to revert to ‘normal’ VAT accounting, however there are still some useful schemes and concessions that might assist in easing the pain of leaving the Scheme.
Any business with annual turnover less than £1,350,000 can use the Cash Accounting Scheme. This allows VAT to be accounted for upon receipt of payment, rather than on the raising of an invoice, thereby providing the business with a cash flow advantage as they would not be ‘out of pocket’ for the VAT amount if their customers delayed or reduced payment. One downside of the scheme is that VAT on purchases can only be recovered once the payment is made, whereas ‘normal’ VAT accounting allows recovery to be made once a purchase invoice is received, whether payment has been made or not.
A similar turnover limit applies to businesses wishing to use the Annual Accounting Scheme. This scheme allows a business to pay an estimated amount at regular intervals (usually 9 monthly instalments) based on the annual VAT liability, and then a final balancing payment. It also allows just one VAT return to be submitted at the end of the year. One benefit of the scheme is the knowledge that regular payments are going out throughout the year to cover the VAT liability, however some businesses benefit from the discipline of having to carry out quarterly accounting and submission of returns and payment, so this should be borne in mind.
A business that trades in second hand goods – antiques, cars, horses etc. – can use a Margin Scheme to account for VAT. This calculates the VAT amount contained within the profit achieved on the ultimate sale, so if there is no profit, then no VAT is declared. This scheme can be of great benefit to those in the sector, but requires strict control and recording of stock purchase and sale.
Any business that ultimately takes the decision to leave the Flat Rate Scheme will have to ensure that all valid VAT receipts and invoices are obtained and retained for all expenditure, something that may not have been the case whilst using the Scheme.
As with any change to the business accounting methods it is advisable to seek advice and clarification before taking any action, so please ask your normal Burgess Hodgson contact for further information.