How will changes to the VAT Flat Rate Scheme affect you?

How will changes to the VAT Flat Rate Scheme affect you?

In his first (and, it transpires, last) Autumn Statement since taking over as chancellor, Philip Hammond has announced a number of changes that will affect businesses.

In addition to announcements around benefits in kind and R&D, the chancellor has also revealed that changes will be made to the VAT Flat Rate Scheme.

Small business help

Introduced in 2002, the VAT Flat Rate Scheme was designed to help small business owners by introducing a fixed rate of VAT paid to HMRC that varies depending on the type of business, its revenue and the sector it operates in.

In general, the amount of VAT that an organisation pays or claims back from (HMRC) is also the difference between the VAT it charges to customers and what it pays on its own purchases.

Under the scheme, businesses keep the difference between what they charge customers and what is paid to HMRC.

There is no ability to reclaim VAT on purchases except for certain capital assets over the value of £2,000, but over the past 14 years it has proven very popular with many small businesses as a means of reducing their VAT bill.

New rate

From April 2017, the scheme is set to be amended so that a new 16.5 per cent rate will be introduced for businesses with limited costs, such as many labour-only businesses.

Although it is thought that this may “level the playing field”, for those who are affected by the changes it could mean they end up paying more.

To find out how your business will be affected by the changes and how to reduce your VAT bill, contact Garbutt + Elliott’s team of experts. Our tax team can provide help and advice on a range of matters, including whether the VAT Flat Rate Scheme is right for your business.

Ongoing assistance

G + E can also advise on existing aspects of the VAT Flat Rate Scheme. Some businesses may find that they are paying too much VAT based on their choice of sector outlined in the HMRC guidance referenced above.

As HMRC does not normally check the choice of sector when processing an application, it could mean paying too little tax, resulting in an unexpected VAT bill at a later date.

Businesses may also be paying too much VAT, as the choice of sector determines the flat rate percentage applied to turnover when calculating the amount of VAT paid.

If you and your business require help and advice on the VAT Flat Rate Scheme or have questions around which sector you operate in, contact Alex Millar or our dedicated team of VAT and tax experts at