This is a way of dealing with your VAT payments that HMRC brought in as a measure to make it easier for taxpayers to complete their VAT returns.  Instead of doing them in the ‘normal’ way – pay over VAT on income, less VAT on expenditure, a business is able to take the gross income and apply a fixed percentage to arrive at a single figure of VAT payable.  For each broad group of trades, there are different percentages.  It is restricted to small businesses and in essence, it saves the bother of worrying about obtaining and retaining VAT invoices and it does make it a bit simpler.  The percentages are such that it might not suit every business and from an early date, it was acknowledged that there would be winners and losers, especially if a business received income that was either zero rated or exempt.

As regards winners, there have been businesses for whom there was a monetary gain, quarter after quarter and although it may seem hard to believe, some businesses and organisations went out of their way to benefit from it if their circumstances allowed them to.   As with any profitable (but in this case legal) scheme, the promoters of the scheme twigged that this was going on and in last year’s Autumn Statement, it was announced that HMRC would be taking steps to fight this perceived “abuse”.  Feet were obviously stomped and a few teddies were thrown out of prams.  So, from 1 April 2017, unless HMRC back down, there will be a new regime in place for certain types of business – those whose businesses have little VAT on costs.

HMRC have come up with a type of business that they will call “Limited cost traders”.  Per HMRC proposals these are defined as businesses that spend less than 2% of its VAT-inclusive income on goods (not services) in an accounting period.  There is another definition, but my eyelids started drooping at the very thought of putting it into print here.  (Please ask, if you need that information.)

The end result is that those businesses will pay a straight 16.5% of their income, as VAT, no matter what trade category they are in.

Example for accountant or book-keeper:

Flat rate:  14.5%

VAT quarter’s income     £30,000, VAT charged = £6000.  Total is clearly £36,000 including VAT

Until now, the VAT paid over in the scheme would be £30,000 times 14.5% = £5220.  Thus, the business would make a profit of around £800 each quarter, less any VAT on costs. 

Under the new scheme, they would pay over 16.5% of the £36,000 = £5940, so there is a clear discouragement to continue using the scheme.

What was happening, apparently, was that a significant number of small businesses were registering, just to profit from the ‘gain’ and HMRC felt obliged to do something about it.  HMRC appear to have forgotten that, in most cases, there was remarkably little gain (in global terms) and also that the business would be paying tax on that gain.  When you consider this in the same light as the £billion ‘sweetheart deals’ enjoyed by certain multi-nationals, it pales into insignificance.

Comment

I despair sometimes.  HMRC bring in this measure and they introduce another layer of complexity for a large number of businesses whose main motive in using the scheme was to make life easier.  For them, with no sinister motives, life has just become more complicated, especially as they have to check the position each quarter to see whether they are affected by the new measure.  The words sledgehammer and incredibly small nut spring to mind.

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