Do you use the VAT Flat Rate Scheme? If so you must read this!

We are now facing the changes to the VAT Flat Rate Scheme announced back in November 2016 by the Chancellor.

From 1st April 2017 you need to decide whether to continue using the Flat Rate Scheme, adopt the standard 20% rate (understanding that you will need to keep proper VAT records) or de-register for VAT completely if your turnover is below £83,000.

How to decide?

The first job is to work out whether you are a ‘limited cost trader’ (or LCT) – a new definition introduced by the Chancellor along with its associated Flat Rate of 16.5%.

An LCT spends less than 2% of its turnover (or £1,000 for a low turnover business) on relevant expenses – there is of course a list of what HMRC now categorise as relevant and not relevant.

A business may find it dips in and out of the LCT definition – in which the Flat Rate it uses will also vary between the 16.5% for a LCT and their usual category Flat Rate. Confused? You might be!

Let’s consider Joe, a local IT consultant who invoices around £120,000 per year including VAT to his clients. He also falls into the LCT category and will see his Flat Rate increase from 14.5% to 16.5% - meaning that the VAT he pays across will increase from £17,400 to £19,800. A mere £200 saving against the normal 20% VAT rate which would be wiped out if Joe had to spend £1,000 or more on new software for example. Joe is very good at record keeping and is therefore about to adopt the standard 20% VAT scheme, confident that he will be able to claim back all his purchase VAT.

It’s not for everyone though.

The Flat Rate Scheme is helpful for cash businesses or those with high volumes of small sales so you should seriously think about the amount of time that it saves each quarter.

And of course if your turnover is below £83,000 then de-registering completely is a good choice – and easy to do online!

As with all of our tax tips and web pages this information is summarised and of a general nature. If you would like specific advice, please Contact us Contact us

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