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Further to our newsletter in December, the HMRC consultation on the proposed introduction of a new VAT Flat Rate of 16.5% for ‘Limited Costs’ businesses has closed. As we expected, there has been no change to this policy which will come into effect from 1st April 2017.
The only concession is that companies will be allowed to leave the Flat Rate Scheme from the 1st April, even if it part way through a VAT cycle. As a result, for a company with a February to April VAT return, it makes sense to apply the current Flat Rate Scheme for the first two months and the Standard Scheme for the month of April.
The VAT Flat Rate Scheme was introduced in 2002 to simplify VAT and reduce the administrative burden on small businesses. Instead of paying across the VAT on sales and recovering the VAT on purchases, the business can apply a percentage to their gross revenue based on their trade sector.
The target of this change are labour-intensive businesses with little expenditure on goods, such as contractors, consultants and accountancy firms where, in the view of HMRC, the Flat Rate Scheme has been treated as a tax allowance which is not the intended purpose.
As we outlined in our original newsletter, the headline VAT Flat Rate of 16.5% is on the gross amount and this equates to 19.8% of the net. In other words, for a net £10,000 invoice, of the £2,000 VAT charged £1,980 will be payable to HMRC from 1st April for those under the scheme.
A Limited Costs business is defined as a company whose VAT inclusive expenditure on goods is either:
In this context, goods must be used exclusively for the purpose of the business and the list of excluded items has grown considerably and is now:
Controversially, the digital download of a software is deemed by HMRC as a service whereas the receipt of a physical disk is deemed a good.
In certain sectors, such as architects and surveyors, this distinction will have a profound impact on whether the business is treated as a Limited Costs.
If you are uncertain as to whether you are a Limited Costs business, HMRC have provided an online tool to check this.
The HMRC impact assessment indicated that they expect around 4,000 businesses to switch to standard VAT accounting. The compliance cost of switching to HMRC is estimated at £180 per business.
Our view is that HMRC have severely under-estimated the number of switchers. Since the announcement of this change, at CooperFaure we have run our own impact assessment with our clients that would be subject to the VAT Flat Rate of 16.5%, they will universally be materially better off switching to standard VAT reporting.
The key is making the process of recording and claiming this VAT as simple as possible. As a result, we have today begun client testing of OCR digital platforms to make the capturing of this data as simple as a click of a button.
If you are uncertain of whether you will be impacted or would like advice on the best course of action, please contact us at tax@cooperfaure.co.uk to schedule an initial call to discuss this further.
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