During the Autumn Statement 2016 on 23 November 2016, an announcement was made by the Chancellor to change how the VAT Flat Rate Scheme is used by a many small businesses. There had been no hints or whispers of such changes, so this came as a shock to us accountants and tax advisers I can tell you! 
When do the changes come into effect? 
1 April 2017 
Who does this effect? 
Small businesses, freelancers and contractors currently using the Flat Rate Scheme, who spend very little each year on goods (unfortunately this will be most freelancers and contractors). 
What are the changes? 
Currently many small businesses, including freelancers and contractors, have been able to make some additional money each year by being VAT registered via the Flat Rate Scheme. This is covered in more detail in our previous article, but in simple terms the business would charge their client 20% VAT, but pay VAT to HMRC each quarter at a lower rate depending on their business activity. The most common rates being 13% for film/TV production, 14% for management consultancy and 14.5% for IT consultancy. 
The Flat Rate Scheme was originally introduced in 2002 with the intention to help small businesses simplify their bookkeeping and VAT calculations. HMRC have now realised that a number of small businesses – particularly freelancers and contractors are making money by using the scheme – and have decided that this is not acceptable and is not in the “spirit” of the scheme. For this reason, rather than simply remove the scheme, they have added some additional requirements that the business must meet in order to make use of the schemes published rates. 
If the business spends more than 2% of its gross turnover (and this must be no less than £1,000) a year on goods (this does not include services, nor computer equipment and motor vehicles, nor food and drink), they can remain on the scheme and continue to use the published flat rate percentage for their business activity. For a business whose gross annual turnover is £100,000 for example, you would need to spend at least £2,000 per year on goods to qualify. 
However, if the business does not meet this requirement, they can remain on the flat rate scheme but are categorised as a “low-cost trader” and as such their flat rate percentage is set at 16.5%. This is the new flat rate percentage for what HMRC are calling “low-cost traders”. 
We are still waiting on further information and detail from HMRC as to exactly how this will work and will update you as required. 
Are there any options? 
If your turnover is below the VAT de-registration threshold you could consider de-registering from VAT. Is this worthwhile? 
Remove your business from the VAT Flat Rate Scheme, and keep a record of the VAT on all expenses to be able to complete a full VAT return each quarter (this would mean that your quarterly VAT bill would be calculated as the VAT charged on your sales less the VAT you paid on your expenses). In the majority of cases, I would advise against this approach unless you have significant VAT to claim on regular costs for services. 
We will contact our clients directly to address these options and confirm the best way forward. If however you have any queries, please do not hesitate to get in touch. 
Written by: 
Nicola J O'Sullivan -  
Effective Accounting 
Founder | Xero Champion | IR35 Expert 
Tagged as: VAT
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