The FreeAgent Blog
It's a new financial year and there have been changes to the VAT flat rate scheme, the alternative way for small businesses to work out how much VAT to pay HMRC each quarter. If you currently use the flat rate scheme, or are thinking about switching to it, these changes could impact you. Here’s the lowdown on the recent adjustments.
What is the VAT flat rate scheme?
The VAT flat rate scheme (FRS) is an alternative way for small businesses to work out how much VAT to pay to HMRC each quarter. When you are using the flat rate scheme, you still charge VAT to your customers in the usual way, but you also pay a percentage of your total sales to HMRC as VAT.
This percentage depends on what your business's trade is. If you’re in the first year that your business is registered for VAT (which is not necessarily the same as the first year you’re on the VAT flat rate scheme), you also get a 1% discount on the percentages – so you would use, for example, 9% instead of 10% for advertising.
The advantages of using the VAT flat rate scheme can include simpler record-keeping (because you don’t have to figure out what VAT you can claim on your purchases) and it can also save you money(although this depends on what sector you’re in and how much VAT you pay on your costs).
New rate starting 2017: ‘limited cost trader’
From 1 April 2017 businesses with a low cost base (who don’t buy many goods) will now be known as ‘limited cost traders’. A limited cost trader is defined as one that spends less than 2% of its sales on goods (not services) in an accounting period. A business would also be a limited cost trader if it spends less than £1000 a year on certain goods; businesses such as accountants and IT consultants, buying very few goods and selling predominantly their own labour, are likely to be limited cost traders.
Many small businesses rely on the FRS to simplify the management of their taxes, and will now have to spend time every quarter working out whether they count as limited cost traders or not.
Limited cost traders can still use the VAT flat rate scheme but their percentage will be 16.5% (which is currently higher than any other rate).
Why has the scheme changed?
This change has been designed to stop people taking advantage of the VAT flat rate scheme by registering for VAT before they have to and saving money, but it will adversely affect many small limited cost traders.
What to do if you want to start using the VAT flat rate scheme
Take a look at this handy guide if you’re wondering if you’d be better off on the VAT flat rate scheme. If you use FreeAgent and set your FreeAgent account to flat rate VAT, it will calculate all the numbers for you.
What to do if you’re currently using the VAT flat rate scheme
If you’re a limited cost trader and using the VAT flat rate scheme, your percentage will be 16.5%. Use our VAT FRS calculator to determine if you would continue to benefit from using the flat rate scheme.
There are several ways to make changes to your VAT flat rate scheme status in FreeAgent:
- If you want the change to your flat rate scheme status or percentage to take effect from a VAT quarter start date, please follow the instructions outlined in our article on checking, editing and locking a VAT return.
- If you want the change to your flat rate scheme status or percentage to take effect from a date that falls mid-way through a VAT quarter, you will need to complete the following steps to file your VAT return for that quarter.
Now that spring has officially sprung, it’s almost time for a new tax year. Whether you currently use spreadsheets, or a desktop or online accounting system, if you’ve been thinking about making the switch to a better system then a new tax year is the perfect time. Here’s why the first week of April is the best time to move to a brand new accounting system.
A new accounting year begins in April 2017
For many limited companies, 1st April is also the start of their new accounting year, for sole traders this is often 6th April, and for all companies 6th April marks the beginning of a new payroll year. The new accounting year is the point in the year when accounts from the previous year are being finalised and you’re starting afresh for the new year.
Less work for you if you switch now
At the start of a new accounting year, the amount of information you need to input into a new accounting system is much less. You can just carry over a few summary figures for example:
- your accounting dates
- how much your business owned and owed as at the end of the previous accounting year - for example, how much cash you had in the bank, what your customers owed you, what you owed to your suppliers, and so on
- if your business is VAT registered, then your VAT registration number
If you’re midway through a quarter in April, you’ll need these plus just a few more details.
Here’s a handy video about switching your accounting software in April:
Why choose to switch to FreeAgent in April?
- It’s tailor made - FreeAgent is specifically designed for the needs of freelancers, contractors, small businesses and their accountants
- Expenses are a breeze! You can snap receipts on your phone and send them straight to FreeAgent
- FreeAgent gives a live view of business cash flow by connecting to your online bank accounts and importing transactions into your accounts
- Tax time isn’t stressful for FreeAgent users - you’ll always know what you owe, and FreeAgent files VAT and Self Assessment directly to HMRC for you with a simple click
- FreeAgent helps you get paid quickly by sending recurring invoices automatically and nudging late-paying clients with automated reminders
- The dashboard view shows how your business is doing at a glance, so you can plan ahead and forecast what’s coming up
FreeAgent offers a free 30-day trial, so get ready to make the most of the new accounting year in April and give it a try!
Check the timing of planned asset purchases
Are you planning to buy a new large piece of equipment for your business, such as a computer?
Check how much you’ve already spent on large items of equipment thus far in the tax year, assuming you prepare your accounts to 5th April each year. The annual investment allowance, which lets you claim tax relief of 100% of the cost of qualifying assets is currently £200,000. However, you may have to pro-rata the annual investment allowance depending on what date you use for your accounting year end.
The annual investment allowance is not an allowance you can carry forward, so you either use it or lose it! Remember, too, that not all assets qualify for the annual investment allowance. Cars don’t qualify, for example.
Plan your disposals, too
Conversely though, if you're planning to sell an asset that would give rise to capital gains tax, you could be advised to wait until after the end of the tax year (i.e. 5th April 2017) or later, if you can. Then you'll pay the capital gains tax a year later!
But it might not be the best idea to wait if you're planning to sell a lot more assets next year. This is because each year, every individual gets an annual exemption that we can set against capital gains. This was £11,100 for 2016/17. The figure for the tax year to 5th April 2018 hasn’t been announced yet, but it’s likely to be that or higher.
This exemption can't be carried forward to the next tax year if you don't use it. It’s another case of use it or lose it!
So if you're going to be selling a lot of assets that give rise to capital gains tax in the near future, you may opt to spread the sales between two tax years instead (for example, sell some in March and some in May), to make best use of your annual exemptions.
Although you may pay tax sooner, you'll pay less tax overall if you do that.
Time your costs...
You might also be able to bring forward tax relief if you have genuine business costs coming up soon. Incur them in March rather than in April, and you could get the tax relief on those costs a year earlier.
If, for example, you've been thinking, "I really must get some new business cards printed", and your business's accounting year end coincides with the tax year - then grab your logo file and get down to the printer's before 5th April!
Remember, unless you’re using the cash basis of accounting, expenses go into your business accounts when they're incurred, not when you pay for them - so even if you don't pay the printer till 6th April, so long as (s)he did the work before 5th April and you have an invoice, you should be OK to put that expense into your accounts.
...and your income
It's tempting to wait until 6th April to invoice your customer for some work done, so that this income goes into your next tax year and you pay tax on it a year later. HMRC knows that trick, though!
If you do the work before the end of the tax year, you need to accrue that income, i.e. count it as income of the tax year in which you did the work.
The exception is if you’re preparing your accounts on the cash basis, when you count the income when your customers pay you, instead.
Make use of government-backed schemes
The Chancellor does (sometimes) make tax relief available. Here are some schemes that you might find helpful:
- If you're looking to put some money aside, consider investing what you can of this year's allowance in an ISA, because this year's allowance will be lost on 5th April*.
- Consider putting money into a pension, to get tax relief. Speak to your accountant and your financial adviser if you want to do this, because there are rules around tax avoidance in this area.
- If you want to invest in someone else's business, consider investing in shares under the Seed Enterprise Investment Scheme.
* That's £15,240 in 2016/17.
Tax is never simple at the best of times, but by timing your sales and purchases carefully you can stay within the rules and yet make sure that you don’t pay too much tax.
Following last week’s Budget announcement, in which the Chancellor revealed that Class 4 National Insurance Contributions (NICs) were set to rise to 10%, we’ve since learned that, thankfully, these plans have now been scrapped.
The proposed increase to class 4 NICs could have had serious ramifications for the UK’s freelancers and contractors. These types of businesses are the backbone of the UK economy and need to be supported - not viewed as an easy target by the government.
It is very unfair to position freelancers and contractors as not being on a level playing field with those who are employed. These business owners have none of the employment rights or the security that employed workers do and there must be some recognition for that, unless the government wants to cripple this very important and growing part of the UK economy.
While I’m delighted that the proposed class 4 NIC increase is no longer going ahead, I’m disappointed to see that there has been no similar U-turn over the other contentious issue in last week’s Budget: the decision to cut the dividend allowance. This has the potential to be equally damaging to the economy, as it will not only deter business owners from investing and growing, it will also disproportionately affect Britain's smallest businesses.
When there are many well-publicised cases of big businesses avoiding paying their fair share of tax in the UK, it seems unjust for the government to be doggedly pursuing the smaller ones instead.
Page 2 of 156
- Pre-election Finance Bill adds to MTD uncertainty
- How MTD will work for businesses with an accounting year that doesn't match the tax year
- Important news for contractors - changes to IR35
- New tax year: what has changed?
- New VAT flat rate scheme rate for certain businesses