In the 2016 autumn statement, a major change to the Flat Rate VAT Scheme was announced – which came into effect on April 6th, 2017. It’s quite a big change and means that many people who previously used this scheme to their advantage, are now finding that it is far less beneficial. If you are one of those people, or if you are looking at VAT options at the moment, you may want to read on.
What is the Flat Rate Scheme anyway?
Most limited company contractors and freelancers are ‘service based’ businesses – in that they charge money in return for their time. As such, the standard VAT scheme is not really suitable, as they cannot claim VAT back on goods which are bought in as part of their business activity. Which is why many contractors have chosen the Flat Rate VAT Scheme over the years.
With this scheme, contractors and freelancers simply paid a ‘flat rate’ percentage for their VAT, which varied depending on the type of business. For example, someone in the advertising world may only have paid 11% of their VAT-able income, even though they charged VAT at 20%. This not only made working out their VAT far simpler, it also meant they were making a profit on that VAT. But not anymore . . .
How the Flat Rate scheme is changing
With the new scheme, there is a standard rate of 16.5%. This means that anyone who was previously paying a lower rate is now worse off, and the Flat Rate Scheme may be less valuable. There are some exclusions – if you are what HMRC refers to as a ‘limited cost’ business, but for most contractors, the VAT options are now far less beneficial.
So, what should you do next?
If you are not currently VAT registered but need to be, then you have to look at any business purchases you make, and see what VAT you could claim back and whether this would make you better off than the Flat Rate Scheme. And if you are already registered but now fall below the current threshold of £85,000, you may want to think about deregistering altogether.
As always, if you need any further advice please contact your accountant.