NEWSLETTER
Spring 2017
he Impact of Flat Rate VAT changes
he Flat Rate Scheme for VAT ( FRS ) is being altered from pril 2017 . FRS is a scheme that has real benefits for hardressed owner-operator businesses and they can ill-afford ew costs on top of the 7.5 % dividend tax increases ( that ave been calculated to add over £ 1,500 p . a . to those rawing £ 48k , but only just over £ 1,300 p . a . to those drawg £ 78k because of the inequities of the tax banding ).
icro-businesses with an annual turnover of under £ 85,000 om 1 April 2017 are not obliged to register for a full VAT ccounting scheme ( whereby you charge VAT to most cateories of customer but can claim back VAT on qualifying urchases and business costs ). It requires quarterly returns nd payments , which small businesses often find onerous .
nder FRS , accounting is simpler . It can be used by busiesses with a turnover of under £ 150k . You do not pay over AT in the normal way , you charge it then automatically ay over the difference between what you have charged , nd a reduced percentage on your costs based on your busiess sector ( based not on the net sales but on VATclusive sales ). Because not all purchases are subject to AT , many fully-registered VAT companies in reality are ill better off than FRS ones , so it can be a close call hich way to go .
for example , different retailers pay different percentges :
Retail of food or childrens ’ clothing : 4 % ( because these are supplied and sold at zero rate )
‘ Other retail ’ not otherwise classified : 7.5 % ( because on average some VAT items are included in the course of business )
hat is the change ?
ecause the ‘ black sheep ’ were in the employment sector , here people sell their own services and their costs are xtremely low , the Government has focused on ‘ Limited ost Traders ’, or labour-only operators .
These have costs of less than 2 % of their turnover , or less than £ 1,000 p . a . if the costs total more than 2 %. They will in future have to pay 16.5 % tax . This in conjunction with the current increase in tax on dividends will make it a tough year for many .
This is an increase for many consulting firms that previously paid 14.5 %. But that ’ s not the only bad news .
In addition , tight new constraints are being applied by HMRC on what expenses the business can claim . Although they are in the services sector , and by their very nature they will sub-contract services from other practitioners , or buy in IT ( even just in terms of essential web server supply ) they will not be able to mitigate these fundamental costs . Only hard physical goods will count . Even then , there are important exceptions – you cannot claim for :
� Food and drink , even if this is for sustenance on a business trip
� Vehicles and parts , even though many people cannot operate without a car or van ( except where the business is one that carries out transport services – like taxi )
Capital goods , unless they are capex of over £ 2,000 – so blown-up printers or computer cables cannot be claimed .
What are the options ?
There are three routes that such operations can follow :
� Continue with the FRS Scheme and swallow the cost increases
� Register voluntarily for the full VAT accounting scheme
� De-register completely from VAT
We at Odiri Tax Consultants are specialists in accounting for small businesses and we can advise you on the best course to take in your particular situation .
If you continue with FRS in such cases , your costs will rise but you will continue to have a somewhat easier administrative burden , but it is about to become more onerous than before in terms of qualifying costs .
www . odiritaxconsultants . com Call us on 01733808075