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Broome Affinity reacts to the announced changes to the VAT Flat Rate Scheme

Published on Wednesday, November 23, 2016 in category:


Chancellor Phillip Hammond today announced in his Autumn Statement that new rules will be introduced, effective 1 April 2017, which will mean that for most contractors and freelancers there will no longer be a financial benefit to being on the VAT Flat Rate Scheme (FRS).

Before I explain the changes, you need to remember that the FRS was introduced as a means to reduce the administrative burden of being VAT registered, rather than a way to get an extra couple of grand a year profit. This was only ever a (rather nice) by product.

The fact that it was ill-thought out and badly drafted meant it was open to abuse, which of course it was. As a consequence of, we suspect, such abuse in the care sector, the government are introducing these changes and genuine contractors are, once again, being caught in the crossfire.

What are the changes?

Section 4.51 of the Autumn Statement states “The government will introduce a new 16.5% rate from 1 April 2017 for businesses with limited costs, such as many labour-only businesses.”. This means that, rather than paying between 13% and 14.5%, you will, from 1st April, be required to pay 16.5%. Basically, this is the same as the 20% you’ve charged, because remember the FRS rate is based in your VAT inclusive income, not the VAT exclusive income:

Current rules:

£75,000 plus VAT £15,000 = £90,000

£90,000 X 14.5% = £13,050.

Saving £1,950

New rules:

£75,000 plus VAT £15,000 = £90,000

£90,000 X 16.5% = £14,850.

Saving £150

 

What are the options?

You can stay on the FRS and accept the losses, but the administration will be the same.

You can come off the FRS and at least be able to claim VAT back on your standard rated costs. Typically these will be your accounting fees, your mobile phone, most accommodation, office expenses. The administrative burden is extra. You need to retain ALL VAT receipts you are reclaiming VAT on and you’ll need to make sure they are properly accounted for in your accounting system. Most accounting systems, like our favourite, Freeagent, should manage this, but you’d still need to be careful.

If your annual turnover is below £81,000, you could deregister for VAT altogether. You’d lose any FRS benefit but the accounting and admin side will be much easier.

From our very brief and limited research so far, it seems that most contractors will be as well staying on the flat rate scheme, but some, especially those working away from home and living in hotels, might want to look at the standard accounting.

And, if your choice is between deregistering and the new FRS, I’d say deregister every time.

Any positives?

Not really, from a financial point of view, but I guess it will level the playing field somewhat and will stop risk-averse contractors from gaming the system by shoehorning their trade or profession into a sector or classification with a lower rate. It’s always been difficult to argue why a “mechanical engineer” could pay 10.5% while a “management consultant” pays 14.5%, when they have an extremely similar cost base, accounting requirement, and way of providing their services.

 

For more information, please call the head office on 01324 464510 or contact your BroomeAffinity personal accountant by mobile, email or text message.

 

Errors and omissions excepted. The announcement was only a couple of hours ago :-)