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VAT FLAT RATE SCHEME : ALL CHANGE

As you may be aware HMRC decided to curb on businesses who use the Flat Rate Scheme and introduced “Limited cost businesses” from 1 April 2017

If you’re a limited cost business, you should use the flat rate of 16.5%. There’s a simple calculator available to help businesses work out whether they’re a limited cost business – follow this link

CALCULATOR

Before you start you’ll need some basic information – use the information that relates to your most recent VAT return period. If you submit quarterly returns this will cover a 3 month period. If you submit annual returns this will cover a full year. You’ll need to know:

  • your turnover
  • the cost of goods – goods must be used exclusively for the purpose of your business and certain goods are excluded from this test, this is explained below

 

Relevant goods

You receive a supply of goods (including by acquisition or import) if the exclusive ownership of moveable items is passed to you from another person.

You also receive a supply goods if:

  • your own goods are transferred from another member state
  • they’re transferred under an agreement where title will pass at a later time, such as a hire-purchase agreement
  • receive water or any form of power, heat, refrigeration or ventilation but not if you hire in equipment which does this – that’s a supply of services

Relevant goods are goods that are used exclusively for the purposes of your business, but don’t include:

  • vehicle costs including fuel, unless you’re operating in the transport sector using your own, or a leased vehicle
  • food or drink for you or your staff
  • capital expenditure goods of any value
  • goods for resale, leasing, letting or hiring out if your main business activity doesn’t ordinarily consist of selling, leasing, letting or hiring out such goods
  • goods that you intend to re-sell or hire out, unless selling or hiring is your main business activity
  • any services

Examples of relevant goods

This isn’t an exhaustive list:

  • stationery and other office supplies to be used exclusively for the business
  • gas and electricity used exclusively for your business
  • fuel for a taxi owned by a taxi firm
  • stock for a shop
  • cleaning products to be used exclusively for the business
  • hair products to use to provide hairdressing services
  • standard software, provided on a disk

Examples of supplies that aren’t relevant goods

This isn’t an exhaustive list:

  • accountancy fees, these are services
  • advertising costs, these are services
  • an item leased/hired to your business, this counts as services, as ownership will never transfer to your business
  • food and drink for you or your staff, these are excluded goods
  • fuel for a car this is excluded unless operating in the transport sector using your own, or a leased vehicle
  • laptop or mobile phone for use by the business, this is excluded as it is capital expenditure
  • anything provided electronically, for example a downloaded magazine, these are services
  • rent, this is a service
  • software you download, this is a service

software designed specifically for you (bespoke software), this is a service even if it is not supplied electronically

You’re a limited cost business if the amount you spend on relevant goods including VAT is either:

  • less than 2% of your VAT flat rate turnover
  • greater than 2% of your VAT flat rate turnover but less than £1000 per year

If your return is less than one year the figure is the relevant proportion of £1000. For a quarterly return this is £250.

For some businesses this will be clear, other businesses – particularly those whose goods are close to 2% – may need to complete this test each time they complete their VAT return. This is because you can move from a limited cost rate of 16.5% in one period to your relevant sector rate in another. This would happen if your costs fluctuate above and below 2%.

If you’re a limited cost trader this means that you may pay more VAT than you do on standard accounting – you may want to check to make sure the Flat Rate Scheme is still right for you.

Example 1

A business has a flat rate turnover of £10,000 a quarter. It spends £260 on relevant goods.

This is more than 2% of the flat rate turnover and more than £250 so the rate they need to use is the sector rate for their business.

Example 2

A business has a flat rate turnover of £20,000 a quarter. It spends £325 on relevant goods.

This is more than £250 but less than 2% of the flat rate turnover so the rate they need to use is 16.5%.

Example 3

A business has a flat rate turnover of £10,000 a quarter. It spends £225 on relevant goods.

This is more than 2% of the flat rate turnover but less than £250 so the rate they need to use is 16.5%.

POSSIBLE SOLUTIONS

  • Remain as is (suitable for businesses with small base cost)
  • De-register from the scheme and move to normal accounting scheme (advantage to claim input VAT especially from supplies that aren’t relevant goods for “limited Cost Traders”)
  • De-register from the scheme and move to normal annual accounting scheme (saving you time to deal with this once a year)

The above guidance is Per VAT Notice 733:Flat Rate Scheme for small businesses

Correct as of 22 March 2017

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Budget 2015 – “Post Election”

George Osborne delivered his seventh Budget as chancellor on 8 July 2015

Personal taxation and pay

  • New national living wage will be introduced for all workers aged over 25, starting at £7.20 an hour from April 2016 and set to reach £9 by 2020 – giving an estimated 2.5 million people an average £5,000 rise over five years
  • Low Pay Commission to advise on future changes to rates
  • Inheritance tax threshold to increase to £1m, phased in from 2017, underpinned by a new £325,000 family home allowance
  • Personal allowance, at which people start paying tax, to rise to £11,000 next year (2016-17). The government says the personal allowance will rise to £12,500 by 2020, so that people working 30 hours a week on the minimum wage do not pay income tax
  • The point at which people start paying income tax at the 40p rate to rise from £42,385 to £43,000 next year
  • Mortgage interest relief for buy-to-let homebuyers to be restricted to basic rate of income tax
  • Rent-a-room relief scheme to rise to £7,500

The state of the economy

  • Economy grew by 3% in 2014
  • 2.4% growth forecast in 2015, 0.1% lower than predicted in March, followed by 2.3%, 2.4% and 2.4% in the following years
  • One million extra jobs predicted to be created by 2020

Alcohol, tobacco, gambling and fuel

  • No rise in fuel duty this year with rates continuing to be frozen
  • – Major reform to vehicle excise duties to pay for a new road-building and maintenance fund in England
  • – New VED bands for brand new cars to be introduced from 2017, pegged to emissions for the first year. Subsequently, 95% of car owners will pay a flat fee of £140 a year
  • – Alcohol and tobacco duties not mentioned in statement

Business

  • Corporation tax to be cut to 19% in 2017 and 18% in 2020
  • – Permanent non-dom status to be abolished – from April 2017, anyone who has lived in the UK for 15 of the past 20 years will pay same level of tax as other UK citizens
  • – £7.2bn to be raised from clampdown on tax avoidance and tax evasion with HMRC budget increased by £750m
  • – Bank levy rate to be gradually reduced over the next six years and a new 8% surcharge on bank profits introduced from 2016
  • – Cap on charges imposed by claims management companies and an increase in insurance premium tax to 9.5% from November
  • – New apprenticeship levy for large employers
  • – Climate Change Levy exemption for renewable electricity to be removed
  • – National Insurance employment allowance for small firms to be increased by 50% to £3,000 from 2016
  • – Dividend tax credit to be replaced with a new tax-free allowance of £5,000 on dividend income. Rates of dividend tax to be set at 7.5%, 32.5% and 38.1%.
  • – Annual investment allowance will be fixed permanently at £200,000 from January 2016
  • – A consultation will take place on changing Sunday trading laws
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National Minimum Wage (Oct 2015)

The national minimum wage will increase by 20p an hour to £6.70, the government has announced.

The new rates will be implemented in October 2015.

It is the first time in six years that the rise will be higher than inflation.

The rate for those aged 16 and 17 will rise by 8p to £3.87.

Apprentices will earn an extra 7p an hour, taking their wages to at least £2.80.

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National Minimum Wage (Oct 2014)

The national minimum wage will increase by 19p an hour to £6.50, the government has announced.

The new rates will be implemented in October 2014.

It is the first time in six years that the rise will be higher than inflation.

The rate for those aged 16 and 17 will rise by 7p to £3.79.

Apprentices will earn an extra 5p an hour, taking their wages to at least £2.73.

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Tax changes from 1 April 2015

  • The Corporation Tax rate has been reduced to 20%
  • The new Diverted Profits Tax has been introduced
  • The bank levy has increased from 0.156% to 0.21%
  • Air Passenger Duty has been restructured – abolishing bands C and D
  • Hospice charities, blood bikes, search and rescue, and air ambulance charities will be eligible for VAT refunds
  • Business rates changes (England only):
    • The business rates multiplier has increased from 48.2p to 49.3p (47.1p to 48.0p for small business multiplier). This includes the 2% inflation cap
    • The Small Business Rate Relief scheme has doubled for a further year – providing 100% relief for businesses with a single property with a rateable value of less than £6,000, and tapered relief with a rateable value of £6,000 – £12,000
    • The business rates discount for shops, pubs, cafes and restaurants with a rateable value of £50k or below has increased from £1,000 to £1,500
  • The cultural test for high-end TV tax relief has been modernised and the minimum UK expenditure requirement for all TV tax reliefs has reduced from 25% to 10%
  • A new tax relief on the production of children’s television has been introduced
  • The amount of banks’ annual profit that can be offset by carried forward losses has been restricted to 50%
  • Two new bands for the Annual Tax on Enveloped Dwellings (ATED) have been introduced
  • Capital Gains Tax exemption for wasting assets will only apply if the corporate selling the asset has used it in their own business
  • An investment allowance for North Sea oil and gas, replacing the existing offshore field allowances and simplifying the existing regime, has been introduced
  • A reduced rate of fuel duty to methanol will apply – the rate is 9.32 pence per litre
  • Fuels used to generate good quality electricity by CHP (combined heat and power) plants for onsite purposes are exempt from the Carbon Price Floor
  • Climate Change Levy main rates have increased in line with RPI
  • The VAT registration threshold has increased from £81,000 to £82,000 and the deregistration threshold from £79,000 to £80,000
  • Scottish government’s Land and Buildings Transactions Tax (LBTT) will replace Stamp Duty Land Tax in Scotland
  • The associated companies rules have been replaced with simpler rules based on 51% group membership
  • The standard and lower rates of landfill tax have been increased in line with RPI