Flat rate VAT changes for tiny businesses explained

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Significant changes have been announced for a volume of VAT that many tiny businesses will have to pay.

This will impact businesses that use a VAT Flat Rate Scheme though that spend really tiny on tender materials – such as firms providing services.

The VAT Flat Rate Scheme simplifies businesses’ record keeping, and creates it easy to work out a VAT they have to pay.

The due changes are a many critical component of a Autumn Statement for this form of business.

How does it work?

Normally a business deducts a VAT on a inputs (what they buy) from a VAT charged on what they sell (outputs).

Under a Flat Rate Scheme, that dual theatre routine is simplified to one step.

For example, a prosaic rate commission for a garments emporium is 7.5% – so if a owners of that emporium sells a dress for £120 including VAT of £20 he will compensate a prosaic rate of £9 (£120 x 7.5%) to HMRC. The prosaic rate commission for a investigator group is 12%.

Exactly that sales count can be difficult – the sum can be found on a HM Revenue and Customs (HMRC) website.

The percentages for any form of business change – there is a list here.

The prosaic rate intrigue is designed to give a supervision roughly a same volume of VAT, though should be most easier to work out.

However, since it is an approximation, some businesses will compensate more, and some less. The supervision is endangered that some businesses are regulating a Flat Rate Scheme to compensate reduction VAT than is appropriate

What is changing?

In a Autumn Statement, Chancellor Philip Hammond announced changes that impact businesses that have a really low cost base. These businesses are now called “limited cost traders”.

Limited cost traders can still use a Flat Rate Scheme, though their commission will be 16.5%. So if they sell £120 of work, including £20 of VAT, a prosaic rate volume is £19.80 (£120 x 16.5%).

A singular cost merchant is tangible as one that spends reduction than 2% of a sales on products (not services) in an accounting period.

When operative out a volume spent on goods, it can't embody purchases of:

  • capital products (such as new apparatus used in a business)
  • food and splash (such as lunches for staff)
  • vehicles or tools for vehicles (unless using a car employing business)

A organisation will also be a singular cost merchant if it spends reduction than £1,000 a year, even if this is some-more than than 2% of a firm’s turnover on goods.

Who will this affect?

It will boost a VAT paid by labour-intensive businesses where really tiny is spent on goods. For example, this might impact IT contractors, consultants, hairdressers and accountancy firms.

It will also impact construction workers who supply their labour, though where a tender materials are supposing by a categorical contractor.

Mike Cherry, inhabitant authority of a Federation of Small Businesses, said: “Many tiny businesses rest on a discretionary VAT prosaic rate intrigue to facilitate a government of their taxation affairs.

“We acquire a government’s attempts to clamp down on any injustice of this intrigue by a tiny minority of businesses that use it. However we would be endangered if any tiny businesses who play by a manners now finish adult carrying to compensate some-more to sojourn within a scheme.

“Following these reforms, it is critical HMRC now produces transparent superintendence so that tiny firms know either or not to join a scheme.”

When does this start?

The new manners start on 1 Apr 2017, though might also impact invoices issued, and products bought, from now on.

There is some-more about these “anti-forestalling” manners during sections 8.2 and 9.7 of a newly updated HMRC leaflet on a Flat Rate Scheme.

The intrigue can be some-more difficult than expected, and this note is usually an overview, so be certain to review a superintendence carefully.

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Posted by on Nov 24 2016. Filed under Business. You can follow any responses to this entry through the RSS 2.0. You can leave a response or trackback to this entry

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