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VAT rate changes – should your business move to flat rate VAT?

19th November 2010

We had an interesting call with a client yesterday. He is not happy with the amount of VAT he is currently paying and doubly concerned about the increase in VAT from 4 Jan 2012 – to 20%. He asked me if there were any prospect of reducing is quarterly VAT figure.

As a catering business with forecast turnover of £150,000 he could be eligible for the flat rate scheme. The question is: would he be better off?

Rather than just conducting a one-off piece of work we thought we would extend this exercise to other industries. We need to consider the relative uplift in flat rate percentage compared to the relative uplift in standard rate VAT.

Before we see actual figures for sales and purchases we have to assume similar trends (and scale up output and input VAT appropriately) before and after 4 January 2011.

old flat rate new flat rate increase in flat rate % increase in flat rate % increase in standard rate rate differential
Accountancy/bookeeping 13 14.5 1.5 11.54% 14.29% 2.75%
Advertising/marketing 10 11 1 10.00% 14.29% 4.29%
Architecture/surveying 13 14.5 1.5 11.54% 14.29% 2.75%
restaurants/take-aways 11 12.5 1.5 13.64% 14.29% 0.65%
Entertainment/journalism 11 12.5 1.5 13.64% 14.29% 0.65%
Property management/agency and related 10.5 12 1.5 14.29% 14.29% 0.00%
Beauty treatment/barber shops 11.5 13 1.5 13.04% 14.29% 1.24%
Accommodation 9.5 10.5 1 10.53% 14.29% 3.76%
Laundry/dry-cleaning services 10.5 12 1.5 14.29% 14.29% 0.00%
Legal 13 14.5 1.5 11.54% 14.29% 2.75%
Management consulting 12.5 14 1.5 12.00% 14.29% 2.29%
Photographic servcies 10 11 1 10.00% 14.29% 4.29%
Printing services 7.5 8.5 1 13.33% 14.29% 0.95%
Publishing activities 10 11 1 10.00% 14.29% 4.29%
Pubs/bars 6 6.5 0.5 8.33% 14.29% 5.95%
Car/van repair 7.5 8.5 1 13.33% 14.29% 0.95%
Retailing food, confectionary, tobacco, newspapers or children’s clothing 3.5 4 0.5 14.29% 14.29% 0.00%
Retailing pharmacy services (not medical) 7 8 1 14.29% 14.29% 0.00%
Other retailing 6.5 7.5 1 15.38% 14.29% -1.10%
Retailing petrol/diesel/cars/vans 6 6.5 0.5 8.33% 14.29% 5.95%
Sport/recreation services 7.5 8.5 1 13.33% 14.29% 0.95%
Transport/storage related such as couriers, freight, removals and taxis 9 10 1 11.11% 14.29% 3.17%
Travel agent services 9.5 10.5 1 10.53% 14.29% 3.76%
Food wholesalers 6.5 7.5 1 15.38% 14.29% -1.10%

We then ran a few scenarios for three different industries.

Case Study 1 – restaurant net sales Output VAT Input VAT Net VAT due
Flat rate % Net VAT due
Standard vs flat
Before 4 January 2011 37,500.00 6,562.50 (1,700.00) 4862.50 11.0% 4,846.88 15.63 worse off
After 4 January 2011 37,500.00 7,500.00 – 1,942.86 5,557.14 12.5% 5,625.00 – 67.86 better off
Conclusion – stay at standard rate
Case study 2 – pub net sales Output VAT Input VAT Net VAT due
Flat rate % Net VAT due
Standard vs flat
Before 4 January 2011 32,500.00 5,687.50 (3,445.00) 2,242.50 6.0% 2,291.25 – 48.75 worse off
After 4 January 2011 32,500.00 6,500.00 – 3,937.14 2,562.86 6.5% 2,535.00 27.86 better off
Conclusion – slightly better off
with move to flat rate
Case Study 3 – advertising firm net sales Output VAT Input VAT Net VAT due Flat rate % Net VAT due Standard vs flat
(paying VAT on rent)
Before 4 January 2011 37,500.00 6,562.50 (2,200.00) 4,362.50 10.0% 4,406.25 – 43.75 worse off
After 4 January 2011 37,500.00 7,500.00 – 2,514.29 4,985.71 11.0% 4,950.00 35.71 better off
Conclusion – slightly better off
with move to flat rate

Overall

Before we consider the overall position we must stress that this analysis should be applied to each business on a case by case basis using actual numbers for a VAT quarter. Also, it will only apply if net turnover for the future 12 months is under £150,000 (otherwise you do not have the flat rate option).

However, you can see from our initial analysis that certain industries such as pubs and advertising the jump in flat rate percentage is relatively small. As a result it may be worth performing a thorough analysis if there is currently “not much in it” between the two schemes.

Conversely, for “other retailers” it may be worth considering a change from flat to standard rate accounting as the relative jump in flat rate percentage is actually greater than the standard rate percentage. As before, this should only be done after a comparison of real rather than theoretical figures.

It is well worth contacting a firm of accountants to consider these matters.