Leaving the VAT Flat Rate Scheme is now likely for 100k businesses in the UK with the introduction of new rules for Limited Cost Businesses. The scheme was introduced to simplify reporting for smaller businesses but as a result of alleged abuse the door is now being shut for any where the value of goods purchased is less than 2% of turnover or the de minimis £250/quarter. HMRC have updated their Notice 733 with some Examples for Limited Cost Businesses.
This particularly applies to service industries where there can be significant sums of VAT payable on services purchased, but less on actual goods, the only expenses which can be used as goods are physical goods bought such as:
- purchases or materials for resale
- advertising materials (flyers/promotional goods)
- cleaning materials
- motor running costs but only for transport companies (ie freight and taxi firms)
- Off the shelf software which is provided on a disc, ie not downloads
- Capital equipment purchases
- Any costs where there is some personal use
The following are defined as services:
- Any leasing costs
- Software downloads or bespoke software
- Professional fees, accountancy, advertising
If the company carries on with the Flat Rate Scheme it will have to assess each quarter whether it meets the criteria of goods more than 2% of turnover, otherwise will have to pay the punitive flat rate percentage of 16.5%, almost paying all of the VAT on sales which would be 16.6667%.
Two further loopholes have also been identified and closed:
- Promotional goods (eg pens or calendars) for giving away do not count towards to goods cost for the calculation
- You cannot add a secondary business activity to boost the goods percentage, eg selling sports kit, in a coaching business as that would be a new different activity
As a result almost all small service companies are likely to be better off reverting to the standard VAT basis, paying all of the VAT on sales but deducting for all of the VAT on expenses including VAT on services. For a scheme which is supposed to simplify VAT, the reverse is now the effect as the majority of our clients will now be leaving the scheme. The address to write to in order to leave the scheme is:
HMRC will then write to you confirming the date of leaving the VAT Flat Rate Scheme.
Ideally you should leave the scheme at the end of a quarter, but any entries after 1 April will be subject to the new rules, so for most companies who need to leave it would be better to leave mid period. Most software has the ability to change, but you should make sure the previous quarter has been “filed” before changing the settings. After that date you may have to amend the expense codes to ensure you claim VAT on the correct items and categorise other items correctly. You can only claim input VAT if you have an invoice in the company name.
The final details were released on 28 February 2017 in VAT Notice 733 and we have summarised the information of interest to our clients. You should seek professional advice before taking any steps based on these contents, especially as you cannot opt back in to the flat rate scheme for 12 months once you have left it. If you would like advice in this or other areas feel free to call. Alastair Wood, AW Accounting, Gravesend, Kent – Accountants who “speak your language”