The flat rate was introduced to simplify accounting for smaller businesses – you simply pay a relevant proportion of your gross takings to HMRC each quarter and this varies by industry category. The highest rate is currently 14.5%.
As reported late last year, life is about to become a whole lot more complicated for businesses that supply largely services of labour where goods (and we are still awaiting the precise definition) comprise:
- less than 2% of their VAT inclusive turnover in a prescribed accounting period
- greater than 2% of their VAT inclusive turnover but less than £1000 per annum if the prescribed accounting period is one year (if it is not one year, the figure is the relevant proportion of £1000)
So for example as a management consultant you invoice £100,000 per annum plus VAT of £20,000. The flat rate currently applies is 14% so you pay 14% of £120,000 to HMRC i.e. £16,800. You retain £3,200.
From 1 April 2017, if you do not meet the ‘goods’ test you would pay £19,800 retaining only £200 – 16.5% is a lot less kind than it first appears.
We do know that goods cannot comprise capital items, food and drink and motoring expenses.
There is of course the option to revert to normal standard accounting from 1 April 2017 but that does add complication to the preparation of VAT returns.
For help or advice concerning VAT and your business or any other accountancy questions you may have, why not contact me via the website?
Why not watch my short video below covering the flat rate of VAT?