Accountant Steph Rickaby is warning small business owners who benefit from the flat rate scheme for VAT they may soon have to pay more tax.
In last week’s Autumn Statement it was announced there will be changes to the flat rate VAT scheme and consultation will begin next week on Monday December 5.
Steph, a chartered certified accountant for the last 15 years, said: “Many small businesses choose the flat rate scheme when they have reached the VAT threshold, or when they voluntarily become VAT-registered for other reasons, and many are entitled to do so. It brings benefits as they pay VAT to the Treasury at a lower flat rate on their gross turnover instead of claiming VAT on their purchases and they avoid a lot of red tape.”
All businesses with a turnover of £83,000 or above must charge VAT on all invoices. The flat-rate VAT scheme was originally designed to free the smaller businesses with revenues of less than £150,000 a year, from bureaucracy.
It allows those companies to charge VAT at 20%, but pay it back to HMRC at a lower flat rate – depending on the sector they operate in. The sector rates are set by HMRC. For example, currently an IT consultant would pay 14.5 per cent and a freelance journalist 12.5 per cent.
The Government has decided the flat rate scheme needs to change and it announced in the Autumn Statement that businesses which only buy in a small amount of goods would have to pay more tax under the scheme.
· If your VAT inclusive expenditure on GOODS ( not services and excluding capital expenditure ie computers, food, drink, vehicles parts, fuel) is less than 2% of VAT inclusive Turnover
· Or if it is greater than the above but less than £1,000 per annum
This will affect those businesses where the labour or service is their main source of income. They will be known as ‘Limited Cost Traders’. Any business eligible for the flat rate scheme and which falls into this category will have to pay 16.5 per cent gross turnover to HMRC ie. collect £20 in VAT for every £100 but pay £19.80 to HMRC
The details of how this new scheme is going to work are still being thrashed out – consultation begins on Monday December 5, lasts for eight weeks and then the rules come into effect from April 1 next year.
Businesses which may be affected include:
*companies providing training
Steph said: “The rules around this change are complex and still being decided in detail. Decisions need to be made whether it is still appropriate to be VAT registered or whether a business owner should switch to the standard rated scheme.”
Sunflower Accounts Ltd is a firm of chartered certified accountants, based in Wiltshire, serving the South West, as well as areas of the North of England, London and the South East. It offers a more holistic view of accountancy and business seeking to educate small business owners about finances, helping them plan to achieve personal and business goals. The team work with sole traders, partnerships and growing limited companies. For details visit www.sunfloweraccounts.co.uk
Pictured above: Steph Rickaby, co-founder of Sunflower Accounts Ltd.