VAT Flat Rate changes are imminent. What to do now?

07th March 2017

Following the Autumn Statement we now have draft secondary legislation which is open to consultation and due to be effective from April 2017. We also have anti-forestalling ‘law’ published in the Notice on the Flat Rate which aims to prevent those on the Flat Rate Scheme from attempting to benefit from the existing regime by artificially creating ‘tax points’ pre April.

What does all of this mean?

For many the Flat Rate Scheme (FRS) represents a user-friendly and cost effective way of minimising VAT record keeping requirements. When it was introduced as an optional alternative to ‘normal’ accounting the Government claimed that the scheme would be ‘revenue neutral’ in that there would be both winners and losers in terms of those better or worse off when calculating the net payments due to HMRC. This always seemed an unlikely premise, given that a business would only logically choose to operate the scheme if it made financial sense. It seems likely therefore that, overall, the scheme creates more winners than losers and this now seems to have dawned on HMRC, who are now looking to create obstacles for those who benefit disproportionately.

What are the changes?

HMRC are bringing in a new flat rate percentage of 16.5% for businesses classified as limited cost traders. These are businesses who, each quarter, do not spend at least 2% of their turnover on direct costs (subject to a minimum spend of £250) – if this criteria is not met then the 16.5% FRS rate applies.

The 16.5% charge is equal to repaying 99% of the VAT you collect to HMRC i.e £100 +VAT = £120 × 16.5%= £19.80 to pay.

If you feel your business is likely to be caught by the above changes, consideration needs to be given to reverting back to the standard VAT scheme or if you are under the VAT registration threshold de-registering altogether.

What is the ‘anti-forestalling’ rule and how does it work?

The rule prevents anyone taking advantage of the old rules by artificially creating a tax point pre 1st April. So, if you try to invoice or get paid before 1st April you still need to work out how much of your services will be performed after 1st April and account for VAT/apply the test on the higher rate of VAT for the value of the service being performed after 1st April. This therefore defeats the object of trying to take advantage of the ‘old rules’.

What should I do now?

For some of our clients in the media sector currently using the Flat Rate Scheme our advice will be to cease to use the scheme and opt for ‘normal accounting’ from 1st April. This is because we believe the additional uncertainty and cost of using the scheme means it is no longer worth operating it just for its simplicity. This assumes that the rules will be adopted as envisaged after the consultation process is completed. In order to adopt ‘normal accounting’ HMRC must be notified in writing in advance and they will then confirm the date of cessation of FRS. If in doubt please do not hesitate to contact us as every case is different.

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