Tag Archives: autumn-statement

VAT – Autumn Statement. Unwelcome changes to the Flat Rate Scheme

By   24 November 2016
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Autumn Statement

The Flat Rate Scheme (FRS) is a very helpful simplification of VAT for smaller businesses. It reduces paperwork and can result in a tax benefit for those who use the scheme. Details of the FRS are at the end of this article.

In the Autumn Statement, the Chancellor has announced changes to the FRS to be introduced from 1 April 2017. Under the misleading heading: “Tackling aggressive abuse of the VAT Flat Rate Scheme” the technical note here

This sets out a new FRS rate for businesses with “ with limited costs”.

Broadly, if a business has VAT inclusive expenditure on goods of either:

  • less than 2% of their VAT inclusive turnover in a prescribed accounting period
  • greater than 2% of their VAT inclusive turnover but less than £1000 per annum if the prescribed accounting period is one year

The above excludes capital expenditure, food or drink for consumption by the business or its employees, and vehicles, vehicle parts and fuel.

Then they will be required to use a FRS rate of 16.5% rather than the rate currently applicable.

There will be anti-forestalling provisions in place to avoid manipulation of timing.

What this means

Assume a business is currently using the 12% flat rate:

100 + 20% VAT = 120 x 12% = 14.4 VAT due

120 x 16.5% = 19.8 VAT due at the new rate

Outside the FRS VAT due = 20 VAT due (but input tax recovery available to offset)

Commentary

This will unfortunately affect many small businesses who have no intention and are certainly not involved in “aggressive abuse”. It appears just another example of, as The Times leader once said of the Rolling Stones case “Who breaks a butterfly upon a wheel?”*

 

Flat Rate Scheme
The Flat Rate Scheme is designed to assist smaller businesses reduce the amount of time and complexity required for VAT accounting. The Flat Rate Scheme removes the need to calculate the VAT on every transaction. Instead, a business pays a flat rate percentage of its VAT inclusive turnover. The percentage paid is less than the standard VAT rate because it recognises the fact that no input tax can be claimed on purchases. The flat rate percentage used is dependent on a business’ trade sector.
A business is eligible for this scheme if its estimated taxable turnover in the next year will not exceed £150,000. Once using the scheme, a business is permitted to continue using it until its income exceeds £230,000.
If eligible, a business may combine the Flat Rate Scheme with the Annual Accounting Schemes, additionally, there is an option to effectively use a cash basis so there is no need to use the Cash Accounting Scheme. There has been recent case law on the percentage certain businesses’ use for the FRS, so it is worth checking closely.  There is a one percent discount for a business in its first year of trading.
Advantages
  • Depending on trade sector and circumstances may result in a real VAT saving
  • Simplified record keeping; no requirement to separate out gross, VAT and net in accounts
  • Fewer rules; no issues with input tax a business can and cannot recover on purchases
  • Certainty of knowing how much of income is payable to HMRC
Disadvantages
  • No reclaim of input tax incurred on purchases
  • If you buy a significant amount from VAT registered businesses, it is likely to result in more VAT due
  • Likely to be unattractive for businesses making zero-rated or exempt sales because output tax would also apply to this hitherto VAT free income
  • Low turnover limit

* For those of a literary bent, the original quote is from Alexander Pope’s Epistle to Dr Arbuthnot of January 1735.

VAT Sixth Form Colleges – Changes

By   25 November 2015
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In today’s Autumn Statement, the Chancellor announced that Sixth Form Colleges will be able to convert to academies.

This means that colleges which do convert will need to review their VAT position.  There are immediate decisions to make on how to structure and deal with VAT. This Statement is great news for colleges and there will be an immediate and ongoing VAT benefit if they become an academy.  However, as with all things VAT, there are also pitfalls. As with schools converting to academy status, it is usual that the Trustees and relevant staff will need to consider VAT for the first time.  We are able to guide academies through the VAT maze and help them maximise this new beneficial tax position. We have considerable experience in dealing with VAT and academies and advise over 50 across the country. Please contact us if these changes affect you, or you would like to discuss the implications. Please see our academy services here