The advantage of having a flat rate VAT scheme is that it reduces the amount of admin work for contractors like you. The VAT claimed is simply calculated at a certain percentage based on industry category. (Computer and IT consultancy 14.5%, Advertising 11%, Computer repair 10.5% etc)

This is changing from 1stApril 2017. In short, each business needs to undertake a test to determine whether

  1. Limited Cost Business/Trader OR
  2. Non – Limited Business/Trader

You’ll be classed as a ‘Limited Cost Business/Trader’if your goodscost less than either:

  • 2% of your turnover
  • £1,000 a year (if your costs are more than 2%)

You can take the test by clicking here: (https://www.tax.service.gov.uk/check-your-vat-flat-rate/vat-return-period)

Your costs cannot include:

  • Any services paid for (E-g Accountancy fee)
  • Expenses like travel and accommodation
  • Food and drinks
  • Vehicle costs including fuel unless you’re in the transport business using your own, or a leased vehicle
  • Rent, internet, and phone bills
  • Gifts, promotional items and donations
  • Goods you will resell or hire out unless this is your main business activity
  • Training and memberships
  • Capital items for example office equipment, laptops, mobile phones and tablets

Based on your expenses we believe you will be classed as Limited Cost Business/Trader and your New flat rate will 16.5%(15.5% if you are on First year of trading)from1stof April 2017. Please see below table for the impact.

Daily Rate £300 £400 £500 £600
No of Days per month 20 20 20 20
Income £6,000 £8,000 £10,000 £12,000
VAT @20% £1,200 £1,600 £2,000 £2,400
Total Sales £7,200 £9,600 £12,000 £14,400
Current flat rate @ 14.5% – Repayable to HMRC £1,044 £1,392 £1,740 £2,088
Current Flat rate Savings £156 £208 £260 £312
New Flat rate @ 16.5% – Repayable to HMRC £1,188 £1,584 £1,980 £2,376
New Flat Rate Savings £12 £16 £20 £24
Loss -£144 -£192 -£240 -£288

 

 You have 3 choices,

  1. Remain in Flat Rate Scheme at 16.5%
  2. Deregister from VAT (Provided total sales is less than £81,000 per annum)
  3. Convert to Standard VAT
1.Remain in Flat Rate Scheme at 16.5%

If you decide to remain in no changes to the process and you can still receive 1% discount on first year and can claim VAT on Capital goods above £2000

2. Deregister from VAT

If your daily rate is low and total income (including VAT) is less than £81,000 you can choose this option.

3. Convert to Standard VAT

The Standard VAT means you pay VAT on your sales and claim VAT on certain expenses. For some contractors choosing Standard VAT will be beneficial but it’s not going to be much significant saving compared to current flat rate savings. Please see below table on impact,

Daily Rate

£300 £400 £500 £600
No of Days per month 20 20 20 20
Income £6,000 £8,000 £10,000 £12,000
VAT @20% Collected £1,200 £1,600 £2,000 £2,400
Total Sales £7,200 £9,600 £12,000 £14,400
Current flat rate @ 14.5% – Repayable to HMRC £1,044 £1,392 £1,740 £2,088
Current Flat rate Savings £156 £208 £260 £312
Expenses for VAT
Accountancy Fee (Assuming Accountancy fee is £100+20% VAT) £20 £20 £20 £20
Telephone and Mobile (Assuming Bill is £50+20% VAT) £10 £10 £10 £10
Standard VAT repayable to HMRC £1,170 £1,570 £1,970 £2,370
New Standard VAT Savings £30 £30 £30 £30
Loss -£126 -£178 -£230 -£282

 

If decide to switch to Standard VAT,

  • you will need to provide each VAT receipt
  • analyse them on daily basis
  • be prepared for an VAT inspection

You will require spending additional time for potentially minimal benefit, dependent upon your level of expenditure eligible for reclaim. Your monthly Accountancy fee will increasebecause of additional work involved at our end.

Change date is 1stApril 2017

The changes will be based on payments received on or after 1st April 2017. For example, if your VAT Quarter is April, VAT payable will be calculated at current flat rate % for February and March receipts and at new flat rate (i.e 16.5%) for April receipts. If your VAT Quarter is May, VAT payable will be calculated at current flat rate % for March receipts and at new flat rate (i.e 16.5%) for April and May receipts.

If you are in doubt, please speak to us.

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