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Small businesses face potential huge VAT bill increases

By: Rob Geary Date: 30 November 2016
Category: VAT

New VAT rules slip in ‘under the radar’

Small firms could stand to face a VAT hit of up to 12.5% of their turnover, following a little-reported measure introduced in the Chancellor’s Autumn Statement last week.

One of the leading regional chartered accountants, business advisers and financial planners Lovewell Blake is warning SMEs to review their VAT arrangements carefully following the changes to the Flat Rate Scheme (FRS), a measure which was significantly less reported than headline measures on borrowing, housing and infrastructure.

Chancellor Philip Hammond announced in his Autumn Statement that he intends to target firms on the FRS which have a very low cost base, hitting them with a new rate of 16.5% – which in the worst case scenario could see businesses facing a tax rise of 12.5% of gross turnover.

“The Flat Rate Scheme was introduced by Gordon Brown in 2002 as a way of helping small businesses to simplify their VAT administration,” explained Rob Geary, VAT specialist at Lovewell Blake. “Under the scheme, businesses cannot reclaim input VAT, but in return pay a lower level of output VAT, with the rate determined by the type of business.

“The new measures will mean that firms which spend less than two per cent of their turnover on goods, or less than £1,000 per year even if this is more than two per cent of turnover, will be hit with the new rate. In the worst case scenario, a business on the lowest FRS rate of four per cent would see their VAT bill more than quadruple.

“The measure is most likely to affect labour-intensive and service businesses, of which there are many in Norfolk – consultants, IT contractors, hairdressers, and construction workers who supply their labour but where raw materials are provided by the main contractor.

“We don’t know the full details of the measure yet, but it does have the potential to be extremely expensive for small businesses which are playing by the government’s own rules – not to mention imposing the significant administrative burden of tracking VAT inputs for firms which are in a scheme designed specifically to minimise this type of bureaucracy.”

The new rules come into force on 1 April 2017, but the government has announced that ‘anti-forestalling’ rules will come into effect immediately, which means that goods and services bought and invoices issued from this point on could also be affected.

“The Chancellor is understandably concerned that some small businesses might be using the Flat Rate Scheme to pay less VAT than is appropriate, but for the vast majority of small firms, the Flat Rate Scheme is broadly revenue-neutral, and is attractive mainly for the simplified record-keeping it involves,” said Mr Geary.

“The change seems to have been brought in ‘under the radar’ at the same time as a raft of other announcements, but this could well be the single most important Autumn Statement measure for many small businesses.

“We would recommend that anyone currently on the Flat Rate Scheme seeks professional advice as quickly as possible, to ensure that they are complying with the new rules, and that they are not hit by unnecessary and much-increased VAT bills in the next few months.”

Please contact Rob Geary or Liz Hill if you have any questions about these changes.
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