Understanding Changes To The Flat Rate VAT Scheme

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April 28, 2017
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Our relationship with HMRC seems to be in constant flux. This April, we’ve seen changes to flat rate VAT, plugging what the government sees as a deficiency in suitable tax payments. The flat rate scheme used to be hugely advantageous for freelancers and contractors in all sorts of industries. Now it has been raised in a bid to rein in more VAT. This will surely affect your business going forward: and the question remains, should you opt for the flat rate, or the standard VAT scheme?

We’re here to cut loose your confusion…

What used to be the case?

Before 1st April 2017, VAT schemes were divided into two main camps, one of which was clearly more beneficial for independent professionals earning less than £150,000.

The first, standard scheme was set at (and still remains) 20% on top of your sales. An entrepreneur collects the VAT, holds onto it, and pays it to HMRC, minus any VAT on allowable expenses. This necessitates a laborious compilation of all the receipts you’ve kept for each tax period, evidencing them to the government in order to get what you’re due.

A far simpler method is the flat rate scheme. You still charge 20% on top of your sales, but pay a lower percentage – around 12% – to HMRC. While you can’t claim back expenses under this scheme, it’s ideal for businesses and professionals that don’t have many outgoings. Except, for such businesses, the percentage has now risen to 16.5% – a big margin of difference for how much cash you get to keep.

Deciphering the cost

For instance, let’s say you had £90K annual revenue, working out at £7,500 per month. The 20% standard VAT rate would be £1,250, of which (hypothetically) you might claim £200 against in return for expenses. That leaves a £1,050 overall payment.

So let’s look at the old flat rate VAT, with the same example. Only 12% of the £7,500 would go to the government, totalling £900 while saving time and money on admin you’d also be better off by £150 than if you were on the standard VAT scheme as per the above.

Contrast this to the 16.5% that has been introduced: you’d pay HMRC £1,237.50 which is over £337 more than the old percentage. Also worth noting is that the standard VAT scheme now becomes financially better as you can reclaim the £200 VAT that was incurred on your expenses.

How does it affect me?

Basically then, the Conservatives have lasered in on businesses – like yours, we imagine – that don’t buy a lot of stock and raw materials. Hammond calls these a ‘limited cost trader’ i.e. someone who doesn’t achieve more than 2% of their sales through anything that isn’t a service provision.

IT contractors, freelance designers, and independent consultants are just some of the ventures that’ll see flat rate VAT as a less attractive prospect. Scenarios will vary, of course, but it’s crucial to realise how your take-home pay could be influenced. The standard rate could be much better for you.

Before any decision is made, consult with the Bright Ideas team, and latch onto our specialised contractor/freelancer accountancy service. When the landscape changes in HMRC, we don’t want you to feel the shockwave – call 0161 951 9305 or message info@biaccountancy.com.

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