SMEs warned as VAT changes ahead

Accountancy firm warns small businesses as VAT Flat Rate scheme changes come into force

Leading firm of chartered accountants, Newby Castleman, is advising small businesses to ensure they are fully up to speed with changes to the VAT Flat Rate scheme, as measures to restrict abuse of the scheme become active.

The firm, which has offices in Leicester and Loughborough, previously warned that the new measures would complicate matters for independent traders after they were announced by chancellor Phillip Hammond in his 2016 Autumn Statement.

New legislation now in force will introduce a mandatory VAT Flat Rate of 16.5% for ‘limited cost traders’, removing any variation in the rate for these businesses.

The Flat Rate varies by industry and profession, from a minimum rate of 4% for certain retailers up to 14.5% for some suppliers of professional services. Businesses with a turnover of £150,000 or less can apply to join provided they meet the other conditions of the scheme. It is designed to ease the administrative burden on the user by removing the need for them to separately calculate and record their input VAT. Instead they apply their designated flat rate percentage to their gross turnover and pay over the resulting output VAT with no claim, except in a few limited circumstances, for input VAT.

Any businesses using the scheme going forward will be caught by the changes if their VAT inclusive expenditure on ‘goods’ is either less than 2% of their VAT-inclusive expenditure in a prescribed accounting period or if greater than 2% is less than £1,000 per annum.

Anti-avoidance measures are also in place to avoid companies artificially boosting their outlay to the 2% mark in order to claim the lower rate, such as excluding the money spent on food and drink for employees.

The new rules come after HMRC identified that some labour only traders, such as employment businesses supplying staff, were found to be exploiting the scheme by dividing up into a network of smaller businesses. HMRC estimate that an extra 30,000 applications to use the FRS were received last year.

Brent Goodwin, VAT Manager at Newby Castleman, explains: “As we have stated previously, these changes have been successful in closing some of the commonly exploited loopholes in the scheme, but go against the spirit of the scheme itself by reinstating a degree of the red tape that it was supposed to remove.

“Small business owners registered to the scheme now find themselves at a crossroads. They must make a choice between leaving the scheme if they feel it is no longer financially or administratively beneficial to remain within it, or they can stay in the scheme and ensure that the records on their expenditure are 100% accurate and traceable and support their decision on the VAT flat rate they apply. Traders will in some cases move between their existing rate and the new ‘limited cost business’ rate on a quarter by quarter basis - so much for simplification!

“Some important changes have been made to VAT Public Notice 773 as of May 2017, which define the goods and services whereby VAT is payable, as well as explaining the difference between capital and non-capital goods. We’d advise business owners to acquaint themselves with these changes before making a decision, or consult an accountancy professional if unsure.

“VAT Public Notice 773 also includes a useful link to the HMRC calculator, which gives the trader a quick answer as to whether they need to use the new rate for that quarter.

“Either way, the foundation work to prepare for these changes needs to be done now, or small business owners could be in for a nasty surprise when they receive their next compliance check.”

Newby Castleman is a long-established, independent chartered accountancy firm with locations in Leicester and Loughborough. For advice and guidance on the VAT Flat Rate scheme, or any other VAT matters, contact Brent Goodwin, VAT Manager, on 0116 254 9262 or by email at