VAT flat rate about to ratchet up costs, says local expert

Matt Vice

Small businesses in the East Midlands using the Flat Rate Scheme to pay VAT will face a shock to their finances this April, according to Leicester-based chartered accountants Mark J Rees.

With more than 410,000 businesses across the country using HMRC’s Flat Rate Scheme (FRS), tens of thousands of the region’s smallest firms look set to be caught up in a major change.

Matt Vice, senior manager at Mark J Rees, said: “Many businesses with a turnover of less than £150,000 gross have opted to make use of the Flat Rate Scheme.

“Rather than balance the VAT they charge with the VAT they incur through purchases, they are given a percentage figure to apply to gross sales. This rate will depend on the industry they are in and can vary considerably – from the lowest at four percent to the highest at 14.5 percent.

“They are not allowed to claim back VAT they have been charged, the only exception being capital items above £2,000. It was effectively possible for small companies to gain from the charging of VAT but HMRC seems determined to close off what is now seen as a loophole”.

From 1st April 2017, a large proportion of businesses on the FRS will have to apply the figure of 16.5 percent to their gross sales.

Vice said: “As a result, many small business owners currently on the FRS may choose to opt out and record VAT in the traditional way. Or they can stay on the scheme and retain its more favourable terms by proving they are not a ‘limited cost trader’.

“It’s important to take professional advice, as the situation is still fluid and everyone is racing to interpret what exactly the new regime will mean.

“HMRC will be writing to all affected companies in due course, but given the short time frame, it is well worth starting a conversation with your accountant to be prepared for 1st April”.