Autumn Statement 23 November 2016

VAT Flat Rate Scheme

 

The chancellor is to close an aggressive tax avoidance scheme that was exposed by a Guardian investigation as depriving the taxpayer of “hundreds of millions” of pounds a year. A big blow for contractors today is the tightening up of the Flat Rate Scheme (FRS). The rate will be increased to 16.5% for businesses with limited costs, which will include the vast majority of contractors. This will virtually remove the benefit of the FRS for contractors, which is used heavily throughout the industry.

 

Background

 

The move follows publication of undercover footage last week that revealed how temp recruitment agencies have been ramping up the use of a “contrived” scheme that seeks to make savings through the flat-rate VAT scheme and multiple claims of the employment allowance.

 

It is understood that HMRC has received an extra 30,000 applications from small businesses to enrol in the flat-rate VAT scheme – above what it expected this year. A Treasury source said the bulk of the unexpected applications had come from “unscrupulous agencies” looking to benefit from the schemes.

 

Specifically referencing the abuse by employment firms detailed in last week’s investigation, Treasury documents said: “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 will help level the playing field, while maintaining the accounting simplification for the small businesses that use the scheme as intended.”

 

Flat Rate Scheme advantages

 

The flat-rate VAT scheme is designed to free very small businesses with revenues of less than £150,000 a year from red tape. It allows those companies to charge VAT at 20%, but pay it back to HMRC at a lower rate – depending on the sector they operate in.

 

The scheme can be financially advantageous. For example, an IT contractor earning £100,000 would have seen a flat rate saving of £3,800, under the new rules this will reduce to [just] £200.

 

What is changing?

 

In the Autumn Statement, Chancellor Philip Hammond announced changes which affect businesses which have a very low cost base. These businesses are now called "limited cost traders".

Limited cost traders can still use the Flat Rate Scheme, but their percentage will be 16.5%. So if they sell £120 of work, including £20 of VAT, the flat rate amount is £19.80 (£120 x 16.5%).

A limited cost trader is defined as one that spends less than 2% of its sales on goods (not services) in an accounting period.

When working out the amount spent on goods, it cannot include purchases of:

  • capital goods (such as new equipment used in a business)
  • food and drink (such as lunches for staff)
  • vehicles or parts for vehicles (unless running a vehicle hiring business)

A firm will also be a limited cost trader if it spends less than £1,000 a year, even if this is more than than 2% of the firm's turnover on goods.

 

Who will this affect?

 

It will increase the VAT paid by labour-intensive businesses where very little is spent on goods. For example, this may affect IT contractors, consultants, hairdressers and accountancy firms.

It will also affect construction workers who supply their labour, but where the raw materials are provided by the main contractor.

 

Anti-avoidance measures

 

Anti-avoidance measures are being introduced to avoid manipulation of the VAT tax point.  These are described in the revised edition of VAT Notice 733 reproduced below:

 

“8.2 Special rule for certain invoices issued or payments received after 23 November 2016 and before 1 April 2017

 

You only need to consider the following if you have issued an invoice or received a payment after 23 November 2016 and before 1 April 2017 in respect of a service to be performed on or after 1 April 2017.

 

The following rule has the force of law

 

If (a) you issue a VAT invoice in the period starting with 24 November 2016 and ending on 31 March 2017 and the invoice is in respect of services to be performed on or after 1 April 2017, or (b) if you receive any payment in respect of those services in that period, the supplies of those services shall, to the extent covered by the invoice or payment, be treated as taking place on 1 April 2017 for the purposes of ascertaining your relevant turnover. If the invoice or payment covers services to be performed in a period spanning 1 April 2017, an apportionment based on a fair and reasonable method should be made.

 

Example 1

 

You issue an invoice on 1 March 2017 for a service which is to be performed in December 2017. You don’t treat the service as being supplied on the date the invoice is issued. You must treat it as being supplied on 1 April 2017.

 

Example 2

 

You issue an invoice for £10,000 on 1 December 2016 for services to be performed in February 2017, March 2017, April 2017 and May 2017. The work is spread evenly over the 4 months.

You need to apportion the invoice amount between the services performed before 1 April 2017 and the services performed on or after 1 April 2017. You must therefore include £5,000 in your VAT return for the period in which 1 December 2016 falls and £5,000 in your return for the period in which 1 April 2017 falls.

 

Example 3

 

You issue an invoice for £12,000 on 1 January 2017. This invoice covers services that will be supplied continuously for the whole of 2017. You must include £3,000 in your VAT return for the period in which 1 January 2017 falls and £9,000 in your return for the period in which 1 April 2017 falls.”

 

9.7 Special rule for certain payments received after 23 November 2016 and before 1 April 2017

 

You only need to consider the following if you have received a payment after 23 November 2016 and before 1 April 2017 in respect of a service to be performed on or after 1 April 2017.

 

The following rule has the force of law

 

If you receive a payment in the period starting with 24 November 2016 and ending on 31 March 2017 and the payment is in respect of services to be performed on or after 1 April 2017 the supplies of those services shall, to the extent covered by the payment, be treated as taking place on 1 April 2017 for the purposes of ascertaining your relevant turnover. If the payment covers services to be performed in a period spanning 1 April 2017, an apportionment based on a fair and reasonable method should be made.

 

Example 1

 

You receive a payment on 1 March 2017 for a service which is to be performed in December. You don’t treat the service as being supplied on 1 March 2017. You must treat it as being supplied on 1 April 2017.

 

Example 2

 

You receive a payment for £10,000 on 1 December 2016 for services which are to be performed in February 2017, March 2017, April 2017 and May 2017. The work is spread evenly over the 4 months.

You need to apportion the amount between the services performed before 1 April 2017 and the services performed after 1 April 2017. You must therefore include £5,000 in your VAT return for the period in which 1 December 2016 falls and £5,000 in your return for the period in which 1 April 2017 falls.

 

Example 3

 

You receive a payment for £12,000 on 1 January 2017. This invoice covers services that will be supplied continuously over the whole of 2017. You must include £3,000 in your VAT return for the period in which 1 January 2017 falls and £9,000 in your return for the period in which 1 April 2017 falls."