Along with the expected news of increase to the personal allowance and reduction in the corporation tax rate there was one unexpected change to the flat rate VAT scheme that is likely to have a significant negative impact on most small contractor companies using this scheme.
Currently most contractors use a rate of between 12 and 14.5% to calculate how much vat to pay over and this typically results in a significant cash profit compared to how much they are charging their clients. Under the revised rules coming in from 1 April all low cost traders will be required to use a percentage of 16.5% which effectively removes any element of profit, see below for an example of this working in practice –
Contractor currently using computer or IT consultancy rate of 14.5 % invoices £50,000 per year.
VAT charges to client = £50,000 * 20% = £10,000
VAT paid over to HMRC £60,000 * 14.5% = £8,700
Net gain = £1,300
Under new rules as a low cost trader using 16.5% rate
VAT charged to client = £10,000
VAT paid over to HMRC = £9,900
Net gain = £100
The definition of a loss cost trader is a business whose spending on goods only (not service or capital expenditure) is less than 2% of turnover, or if more than 2% then less than £1,000. Goods exclude things like rent, licences, IT support, subcontractors, telecoms etc which are regarded as services and new equipment like laptops which are capital.
Given the above many businesses who are trading below the current mandatory registration threshold 0f £83,000 may be inclined to de-register to cut down on the unnecessary administration.