Demise of the VAT Flat Rate Scheme

flat rate

Many small businesses currently use the VAT flat rate scheme to simplify the treatment of VAT. Instead of recording all the VAT on purchase and sales, using this scheme allows businesses to apply a fixed rate to sales, which varies according to the trade, to calculate the total VAT payable to HMRC. Other than claiming separately for VAT on larger capital goods purchased, there is no need to record VAT on expenses.

HMRC believe some businesses have been abusing this scheme to pay less VAT than would otherwise have been the case. From April 2017, changes will be made to scheme for businesses spending less than 2% of their sales or £1,000 per year on goods (excluding services such as telephone). Those businesses will in future need to apply a flat rate of 16.5% to their sales, which is significantly higher than the current rates applicable, such as 14.5% for computer and IT consultancy and 14% for management consultancy.

This change will impact on businesses currently using the flat rate scheme that spend minimal amounts on goods, such as IT contractors, construction workers and consultants.

Any such businesses currently using the flat rate scheme, should consider whether they would be better off moving to the standard VAT scheme from April 2017 onwards.

We are able to advise businesses on the best VAT scheme to use. For further assistance pleaes contact your local Lentells office.