Bookkeeping Insight: Changes to Flat Rate VAT

Unwelcomed changes to Flat Rate VAT!

Following The Chancellor's recent Autumn Statement,  there was very little to report to our C9 followers.  However, there was the unwelcome news surrounding the change to Flat Rate VAT.

For those unaware of the Flat Rate VAT Scheme, this was a simplified VAT scheme introduced by HMRC, where business are unable to recover input (excluding capital purchases in excess of £2,000), but they could apply a reduced rate (based on the industry in which they operate) to their gross income, thus gain from a small margin in the process.

This was the perfect scheme for business was little costs, as they would not incur much input VAT to recover so it made perfect sense to benefit from the marginal gain on their sales.

Ironically, HMRC introduced the scheme to help small businesses, only to later change the rules because small businesses were benefiting too much from it.  To combat this, they have brought in a new rate of Flat Rate VAT of 16.5%, which businesses with little costs, or "low-cost traders" as HMRC have brandished them, must apply to their gross sales when calculating what they must pay over on their VAT Returns.

The 16.5% of VAT on the gross sales, equates to 19.8% of the net sales, which almost brings it inline with the standard rate on VAT at 20% and mitigates any possible gain.

HMRC haven't released the full details, but we have been given limited guidance that a "low-cost trader", would be a business who's costs (excluding services) equate to less than 2% of the business's gross income, or £1,000.

Our bookkeepers are constantly trying to ensure our clients are operating as efficiently as possible. So if you would like a review of the VAT scheme that you operate on, please feel free to get in touch.

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