With the January quarter over, that means there is only one more full VAT quarter before the increase in some flat rate schemes.

‘What increase?’ I hear you cry.

Well that’s what I’m here to tell you.

I know, shock horror, HMRC wants yet MORE money and all because in a recent discussion it has been said they are ‘tackling aggressive abuse’ of the flat rate scheme.

I think someone is being a bit dramatic, don’t you?

Anyway, they have decided to target some entities who currently benefit from a reduction of VAT using this type of scheme.

Does this apply to you?

To all consultants out there, the bad news is that, yes, it probably does.

HMRC are penny pinching from the ‘labour-only’ businesses which are being defined as ‘limited cost traders’ and, in true HMRC fashion, they have given us the vaguest of descriptions on what this means.

If your expenditure of goods is less than 2% or less than £1,000 (regardless of your turnover) pro rata, then unfortunately, this applies to you and I’m sorry to say this now means you are all huddled together under the same umbrella flat rate of 16.5%.

They have tried to give us a bit more of an indication of what this means – although I personally would love to question the description of ‘aggressive abuse’. To be on the flat rate scheme you must be turning over less than £150,000 and I don’t quite understand how aggressive you can get with that.
Anyway, rant over… The ‘drama queens’ at HMRC have said the expenditure cannot include car costs (unless running a vehicle hire business), food and drink (such as lunches for staff) and capital goods.

For example, a hairdresser may be seen as a service organisation but due to the amount of goods bought such as hair products they will not have to increase their flat rate percentage.
Yet on the flip side, an IT consultant who doesn’t have as many purchases in order to provide their services is likely to be caught by this new scheme.

So, let’s do the math!

We are accountants after all.

If you provide consultancy services on a flat rate of 14%, turning over gross of £100,000, with the rise to 16.5% you will now be paying an additional £2,500 per year.

Hey, it might not seem a lot on the grand scheme of things, but when you think of the beach break that could buy you it does have that added sting.

More information on this should be released in the spring budget but for now, be mindful of the increase when planning cash flow and get in touch if you have any queries.

Talk to us today, about accounting for tomorrow.

UPDATE:

HMRC have been helpful (shock, we know) and released a calculator to help you understand if you will be affected by the increased rates.

https://www.tax.service.gov.uk/check-your-vat-flat-rate/vat-return-period