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The revised vat flat rate: how it could affect small businesses and contractors

Posted on April 10, 2017

Oil and gas contractors and a range of small businesses could all be affected by the impending crackdown on flat rate VAT.

Introduced more than a decade ago, the scheme was brought in to make things easier for small businesses by decreasing administration and allowing a cushion between incomings and outgoings, as a lower standard rate of VAT was given to the taxman, rather than claiming VAT on expenses. This rate varies depending on sector, for example IT contractors currently pay 14.5% while a travel agent pays 10.5%.
 
However, changes have been brought in to counter the perceived manipulation of the scheme, which came into force at the start of April.
 
The flat rate applicable for all limited cost businesses has been increased to 16.5%. This will predominantly affect businesses that charge only for the labour services they provide, rather than those that sell or provide goods.
 
Graham Bridgeford, partner at north-east firm James Milne Chartered Accountants, explains that the changes are likely to result in a tax squeeze for a range of small businesses.
 
He said: “Businesses will now have to complete a simple test to gauge if they are classed as a limited cost trader, defined as those that spend less than 2% of their total sales on goods, or if they spend less than £1,000 a year, even if this is more than 2% of their goods turnover.
 
“This covers businesses that are labour intensive and includes contractors and consultants. If they match the HMRC criteria for this, they must use the new 16.5% rate, rather than the previous flat rate applied to their business, which was based on their industry sector.
 
“The businesses that will notice a marked difference are those who spend a relatively small amount or nothing on materials, where the main charge is for labour or knowledge. These could range from oil and gas contractors to gardeners, hairdressers and IT contractors among others.
 
“We would urge anyone uncertain about how this may affect them to consult a Chartered Accountant, who will be able to answer any questions and give advice on the best course of action.”
 
James Milne Chartered Accountants serves both personal and business clients across a diverse range of industries, from the Aberdeen and Aberdeenshire staples of oil and gas and agriculture through to retail, hospitality, fishing, haulage, trades, construction and many more.

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