Limited Company Services

Changes to Flat Rate VAT in April 2017

The Government has announced several changes to Flat Rate VAT in April 2017 – this will impact on many contractors who own businesses registered under the FRS.

Flat Rate VAT – how does it work at the moment?

When registered under the FRS currently, the calculation for VAT is simply that the business multiplies its VAT inclusive turnover by its relevant percentage under FRS to calculate VAT payable to HMRC. The business ignores any purchases, as long as they’re not capital purchases exceeding £2000 in value.

Whilst the purpose of the scheme is to ensure that small businesses are not subject to complicated VAT transactions, in practice, many small businesses are subject to a FRS percentage that means they pay less VAT to HMRC than they would have done under the standard VAT accounting scheme.

As an example, the current percentage under FRS for Computer and IT Services is 14.5%. In addition to this, a year one discount is applicable.  This means that in year one of registration, a business registered under the FRS would calculate its payable VAT based on a 13.5% calculation.

Example:

Standard VAT calculation:

Turnover excluding VAT: £100,000.00

VAT collected: £20,000.00

Input tax on purchases: £140.00

VAT payable to HMRC: £19860.00

FRS calculation:

Turnover excluding VAT: £100,000.00

VAT collected: £20,000.00

Input tax on purchases: £140.00

VAT payable to HMRC: £16200.00

Changes to come in April 2017

The Government believes that the FRS is not being utilisted as the law intended and that it has been abused throughout various sectors. As a result, it is making the Scheme less incentivising to use by altering the percentage to 16.5%, irrespective of the sector.  This makes the FRS almost exactly the same as standard VAT accounting in real terms for all Low Cost Traders:

Example:

Standard VAT calculation:

Turnover excluding VAT: £100,000.00

VAT collected: £20,000.00

Input tax on purchases: £140.00

VAT payable to HMRC: £19860.00

FRS calculation:

Turnover excluding VAT: £100,000.00

VAT collected: £20,000.00

Input tax on purchases: £140.00

VAT payable to HMRC: £19660.00

What does this mean?

This means that all invoices as of April 1 2017 will be subject to the new percentage, and therefore, for most contractors, will no longer be worth registration in terms of financial incentive, ensuring that the scheme is being used for what HMRC deem it was designed for – to save businesses time, not cash. We anticipate that businesses under the VAT registration threshold may commence deregistration for VAT as the administrative burden of submitting VAT returns won’t be worthwhile for the business.  Businesses who have benefited from adding their charged VAT surplus into the company will also notice that this is no longer a significant benefit and not a reason to be registered under the FRS.

How can you help?

Here at Green Lantern, we understand that in a world of ever increasing complex legislation that it can be hard to understand what options are best for you and your business. Our experts are always happy to help – just give us a call on 02071642116.