In the Autumn Statement, Chancellor Philip Hammond announced changes which affect businesses which have a very low cost base. These businesses are now called “limited cost traders”.
The new rules start on 1st April 2017.
It will increase the VAT paid by labour-intensive businesses where very little is spent on goods, for example IT contractors, consultants, hairdressers and accountancy firms.
What is the VAT flat rate scheme?
Many small businesses use the flat rate scheme in order to reduce their VAT outgoings, or to simplify their accounting. Under the scheme, eligible businesses pay a fixed rate of VAT to the taxman, and keep the difference between the VAT they charge and the VAT they pay to HMRC. VAT can be reclaimed on some capital purchases over the value of £2,000.
The scheme may therefore give low-expenditure businesses a cash advantage. But the changes mean that that advantage may now disappear.
What is changing?
Under the new rules, so-called “low cost traders” will be required to use a flat rate of 16.5 per cent. This is significantly higher than the rates now used by, for example, journalists (12.5 per cent), estate agents (12 per cent), management consultants (14 per cent), or accountants (14.5 per cent).
As 16.5 per cent of the gross turnover is equivalent to 19.8 per cent of net turnover, this means that there will be virtually no advantage to using the scheme for businesses in these fields.
If you are using the flat rate scheme, please contact us to discuss how the changes will affect you.