So, it seems that there’s been a u-turn on the plan to increase National Insurance, following the recent Spring Budget 2017. The self-employed can feel triumphant on this occasion but it does make we wonder what changes are yet to come.
However there’s no such luck for contractors on the flat rate scheme from April 2017, those changes will still come in and so you’ll need to decide what’s best for you.
How does the flat rate scheme currently work?
The flat rate VAT scheme is used by many businesses as it helps to simplify the calculations and ease any record keeping burdens. This was particularly helpful for small businesses, as there was no need to record any VAT incurred on purchases.
The flat rate percentage used by businesses varied from sector to sector but it was based on their main trade, ranging between 11% for advertising consultancy to 14.5% for computer consultancy. This percentage would then be used to calculate the VAT payable to HMRC on your gross sales.
Plus, whilst in your first year of registration, you’ll get an additional 1% discount.
VAT is charged on invoices to your clients at 20% as normal but the flat rate scheme means that you can’t reclaim any VAT that you pay for purchases (with the exception of spending £2,000 or more on capital assets in one purchase).
For example, if you had net quarterly sales of £10,000 and your trade was computer consultancy:
Net income: £10,000
VAT charged at 20%: £2,000
Gross income: £12,000 x 14.5% = Payable to HMRC £1,740
What are the changes?
From 1 April 2017, it’s likely that many businesses will see an increase in the VAT payable to HMRC, as most of them will fall into the category of having ‘limited costs’.
Each quarter, the business will need to determine if they meet the criteria of a Limited cost trader. You will be a defined as a Limited cost trader, if the amount you spend on relevant goods is either:
- less than 2% of their VAT inclusive turnover
- greater than 2% but less than £250 per quarter (or £1,000 per year for annual VAT returns)
Relevant goods are goods which are exclusively used by the business. For example; stationery and other office supplies, utility bills and physical software (on a disc).
It does not include:
- food and drink that will be consumed by you or other employees
- travel and accommodation costs (including fuel unless you are in the transport business)
- rent, internet and phone costs
- capital items for example office equipment, laptops, mobile phones and tablets
- goods you will resell or hire out unless this is your main business activity
- training and memberships
- any SERVICES; which is anything that isn’t goods – this would include accountancy fees!
If you are a Limited cost trader, as you don’t spend enough on goods, you’re new flat rate percentage will be 16.5% (15.5% if you’re still in your first year of registration), instead of your sector specific rate.
Should you stay on the flat rate scheme?
You’ll need to weigh up if the simplicity of the scheme is still right for you or whether you’ll be better off moving to the standard rate scheme.
If you are a Limited cost trader, had net quarterly sales of £10,000 and your trade was computer consultancy:
Net income: £10,000
VAT charged at 20%: £2,000
Gross income: £12,000 x 16.5% = Payable to HMRC £1,980
This is an increase of £240 in comparison to paying at 14.5% previously.
In comparison to the standard rate scheme, you would pay HMRC the £2,000 VAT that you charged to your client, less any VAT paid on your purchases. You would only need to have incurred £20 of output VAT in the quarter for the standard rate scheme to be better for you!
So, if you are paying your accountant more than £35 plus VAT per month, then you might want to consider switching schemes from 1 April 2017. And that’s even before you start adding up any other amounts of VAT you’ve paid.
Before you rush into this, you just need to think about the implications of changing schemes.
Firstly, it won’t be so easy to calculate your VAT figures, you won’t be able to just add up your invoices issued in the quarter and multiply this by a percentage. You will need to make sure that you are keeping your records up to date with bank payments and receipts for expenses in quarter. And start collecting your receipts, getting a VAT receipt where possible so you can split out the VAT that you wish to reclaim.
If you don’t have software or an accountant to assist then you’ll need to make sure you are comfortable knowing what you can and can’t reclaim VAT on.
Also, the 1% discount still remains for the first year of registration on the flat rate scheme.
Therefore you might want to use this up first, as any difference in changing schemes might be minimal and once your discount ends then move onto the standard rate scheme.
How can Aardvark Accounting help?
We can help you to get your head around the VAT changes, and simplify the jargon for you. Plus, make sure you that you are on the right scheme so you’re not losing out based on your circumstances.
Plus, with easy to use software which can be completed on the move with a handy app where you can upload receipts, then you’ll always be up to date with your accounting records. You’ll never have to work out which rate to use each quarter, this can be done by us as part of the monthly service for £69+VAT.
The best value for personal service and tailored accountancy packages to suit you. You’ll always have someone on hand to put your mind at ease. Contact Aardvark Accounting today, we’re all ears and we’ll do the “aard” work for you!
01425 471917 firstname.lastname@example.org