VAT changes could leave businesses worse off

Small businesses across Shropshire could be hit hard by changes to the flat rate VAT scheme which have just come into force. 

Julie Selley, from Dyke Yaxley Chartered Accountants in Shrewsbury and Telford, said the flat rate scheme was designed to reduce the administrative burden for small businesses by simplifying the way they calculate their VAT liability. 

“The scheme is available to VAT-registered businesses that expect their VAT taxable turnover in the next 12 months to be £150,000 or less. 

“It saves businesses time as they don’t have to calculate and record output tax and input tax when calculating the net VAT that they need to pay to HM Revenue and Customs. Instead, a flat rate percentage is applied to their turnover as a one-off calculation.” 

But a new 16.5% rate has been introduced for businesses with limited costs, such as many labour-only businesses. 

“A limited cost trader is a business that spends less than 2% of its VAT inclusive turnover on goods during an accounting period,” said Miss Selley. 

“Firms who spend more than 2% of their VAT inclusive turnover but less than £1,000 on goods would also be considered to be a limited cost trader. 

“Generally, the firms most affected by the changes would be labour-intensive businesses such as hairdressers, IT contractors, and consultants, who could all find themselves worse off under the new rules.” 

Miss Selley said the rules also required that the goods factored into the VAT calculations were used exclusively for the purpose of the business. 

“There are several types of expenses that cannot be included when calculating the figures including capital expenditure, food or drink for the business or its employees, and vehicles, vehicle parts and fuel – except if it’s a transport business using its own vehicle or a lease vehicle. 

“Clearly these rule changes will affect a whole host of companies, particularly here in Shropshire where small businesses play a huge part in our local economy, and it’s vital that business owners check the small print to see where they stand.”