Self-employed people and small businesses will be left out of pocket following changes to the VAT flat rate scheme announced in last week’s Autumn Statement.
This is according to AccountingWeb’s Autumn Statement analysis, which suggests that service-related businesses operating within the scheme will lose almost all of the cash advantage it currently brings.
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What is the VAT flat rate scheme?
Many small businesses use the flat rate scheme in order to reduce their VAT outgoings, or to simplify their accounting. Under the scheme, eligible businesses pay a fixed rate of VAT to the taxman, and keep the difference between the VAT they charge and the VAT they pay to HMRC. VAT can be reclaimed on some capital purchases over the value of £2,000.
The scheme may therefore give low-expenditure businesses a cash advantage. But the changes, announced in the document accompanying the Autumn Statement, mean that that advantage may now disappear.
Under the new rules, so-called “low cost traders” will be required to use a flat rate of 16.5 per cent. This is significantly higher than the rates now used by, for example, journalists (12.5 per cent), estate agents (12 per cent), management consultants (14 per cent), or accountants (14.5 per cent).
Moreover, as AccountingWeb point out, 16.5 per cent of the gross turnover is equivalent to 19.8 per cent of net, meaning that there will be virtually no advantage to using the scheme for businesses in these fields.
Business owners who are enrolled in the flat rate scheme, or who have opted to register for VAT despite being below the turnover threshold, are being urged to consult with an accountant to see whether they will be affected.
Do you use the flat rate scheme? What do you think of the changes? Let us know in the comments.
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