Changes to flat-rate VAT in more detail with examples
The Chancellor announced in the Autumn Statement the introduction of a new 16.5% flat rate of VAT for ‘businesses with limited costs’. This will be effective from 1 April 2017. It will be the responsibility of the business/limited company to determine whether they meet the definition of a limited cost trader.
This also applies to existing users of the VAT flat rate scheme. A limited cost trader will be one whose VAT inclusive expenditure on goods is either:
- less than 2% of their VAT inclusive turnover in a prescribed accounting period
- greater than 2% of their VAT inclusive turnover but less than £1,000 per annum, providing the accounting period is 1 year.
Anti-forestalling legislation was published on 23 November 2016 to prevent any business/limited company from continuing to use a lower flat rate by issuing an invoice or receiving a payment before 1 April 2017 for services supplied after that date.
What does this mean?
If you are engaged in IT consultancy, management consultancy or any other form of consulting then your limited company will be a business with limited cost and therefore you would be paying VAT at 16.5% instead of whichever rate you are on now. This is regardless of your category of trade which are irrelevant now for any business where you are selling a skillset.
Examples
I have outlined below an example for an IT contractor making £60,000 per annum in revenue and £120,000 per annum in revenue. Practically, you are saving less money now than before when you were on your original flat rate.
| Flat rate % | 14.5% | 16.5% |
| Revenue/turnover | 60,000.00 | 60,000.00 |
| (including VAT) | ||
| VAT @20% | 10,000.00 | 10,000.00 |
| VAT paid at flat rate | 8,700.00 | 9,900.00 |
| VAT saving | 1,300.00 | 100.00 |
| Flat rate % | 14.5% | 16.5% |
| Revenue/turnover | 120,000.00 | 120,000.00 |
| (including VAT) | ||
| VAT @20% | 20,000.00 | 20,000.00 |
| VAT paid at flat rate | 17,400.00 | 19,800.00 |
| VAT saving | 2,600.00 | 200.00 |
Next steps
If your revenue/turnover is under £83,000 we would recommend that you de-register from VAT completely. Please get in touch with us if you are in this category (mostly those of you on day rates of £350 and below). Please get in touch with Jojo.
If your revenue/turnover is above £83,000 then you must mandatorily be registered for VAT but you might want to consider being on the standard rate of VAT. I have outlined below the advantages and disadvantages of being on the flat rate and moving to the standard rate of VAT.
Staying on the flat rate
Advantages
- Hassle free. Status quo remains. Basically you do not have to do any more than what you are doing at the moment.
- You can still reclaim VAT back on capital expenditure (for example purchasing equipment) if the cost of this is over £2000 (including VAT) and you have a receipt.
- Less likelihood of being investigated by HMRC for VAT.
- You are still saving some money albeit less than before.
Disadvantages
- You are not saving as much money as before.
Moving to the standard rate of VAT
Disadvantages
- Increase in our fees to £125 per month plus VAT. There is more of an administrative burden with being on the standard rate of VAT. It takes more time to prepare the VAT return than if you were on the flat rate of VAT.
- Must provide receipts every month to us for VAT claim e.g. all stationary purchases, mobile bill etc. Therefore, there is more work for you to do. However, technology can help you manage this in a time effective way.
- You may not actually save much more than being on the flat rate of VAT. This is because naturally as someone who is selling a skillset your expenses are not large. Also, remember you cannot claim back VAT on petrol and there is no VAT on train/tube travel.
Advantages
- You could save more money than on the flat rate of VAT if (and it is a big IF) you have a large amount of VAT inclusive expenses.