JIM BURBERRY
VAT was sold to the British public when it was introduced back in 1973 as a “simple tax”. Since then there have been various attempts to keep it simple, some successful, some not. Who can forget the so called pasty tax which was an attempt back in 2012, albeit eventually unsuccessful, to simplify the VAT treatment of "hot takeaway food".
In 2002, the VAT Flat Rate Scheme was introduced to simplify paperwork for small businesses when accounting for VAT. The Flat Rate Scheme was a VAT simplification that allowed certain types of small businesses to benefit from its fixed-rate VAT percentages, that varied depending on the type of business. However, as a result of so called “aggressive abuse”, there will be a new 16.5% VAT flat rate applied in the scheme for businesses with limited costs. This will take effect from 1 April 2017. This new measure will mean businesses currently using the Flat Rate Scheme and benefiting from its fixed-rate VAT percentages, will need to determine whether they are a ‘limited cost’ trader and thus whether it is simpler to stay in the Scheme or come out of it. It is estimated that two-thirds of Flat Rate Scheme users are registered for VAT on a voluntary basis and they may now wish to consider deregistering for VAT.
Will this again be a failed attempt to keep VAT simple?
The change means that in theory a self-employed builder could apply six different VAT rates in the first 18 months of his or her business depending on what is spent on building materials and capital expenditure, and where the business is in its VAT registration cycle. So the simple Flat Rate Scheme is now not so simple.
The new measures are in response to recent reports that the Flat Rate Scheme is one of the tax arrangements being abused by employment businesses supplying staff by utilising the services of a Managed Service Provider. However, the changes will impact a wider population of businesses that provide labour intensive services such as building services, professional services, journalism, IT consulting and farming.
Despite coming into force on April Fool’s Day (1 April), these changes will be no joke for many businesses that will not only see their VAT rate increase from this weekend, but the associated VAT accounting process is set to get more complex too.
Jim Burberry, VAT and indirect tax partner at RSM
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