IT contractors, consultants and construction workers most likely to be affected
Among the measures relating to business taxation in Autumn Statement 2016, Philip Hammond announced a change to the VAT flat rate scheme. This could have significant effects on the tax liability of small businesses that currently make use of the scheme.
So what is going to change and who is likely to be affected?
What is the VAT flat rate scheme?
When calculating how much VAT it needs to pay or claim back from HMRC, a business usually works out the difference between the VAT they charge their customers and the VAT they pay on their own purchases.
The flat rate scheme simplifies this process by introducing a fixed rate of VAT which is payable to HMRC. Participating businesses are allowed to keep the difference between what they charge customers and what they pay HMRC.
Businesses may be able to reclaim VAT on capital items that cost £2,000 or more.
To be eligible for the scheme a business must be VAT registered and have VAT turnover of £150,000 or less in the next 12 months.
The fixed rate of VAT that a business will pay depends on their type. So, for example , IT consultants pay 14.5% while those in the publishing sector pay 11%.
What is changing?
From April 2017 there will be changes affecting businesses with very low cost bases. These businesses will now be classed as “limited cost traders” if they spend:
less than 2% of their VAT inclusive turnover on goods in an accounting period; or
more than 2% of their VAT inclusive turnover but less then £1,000 a year.