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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 ratenew flat rateincrease in flat rate% increase in flat rate% increase in standard rate ratedifferential
Accountancy/bookeeping1314.51.511.54%14.29%2.75%
Advertising/marketing1011110.00%14.29%4.29%
Architecture/surveying1314.51.511.54%14.29%2.75%
restaurants/take-aways1112.51.513.64%14.29%0.65%
Entertainment/journalism1112.51.513.64%14.29%0.65%
Property management/agency and related10.5121.514.29%14.29%0.00%
Beauty treatment/barber shops11.5131.513.04%14.29%1.24%
Accommodation9.510.5110.53%14.29%3.76%
Laundry/dry-cleaning services10.5121.514.29%14.29%0.00%
Legal1314.51.511.54%14.29%2.75%
Management consulting12.5141.512.00%14.29%2.29%
Photographic servcies1011110.00%14.29%4.29%
Printing services7.58.5113.33%14.29%0.95%
Publishing activities1011110.00%14.29%4.29%
Pubs/bars66.50.58.33%14.29%5.95%
Car/van repair7.58.5113.33%14.29%0.95%
Retailing food, confectionary, tobacco, newspapers or children’s clothing3.540.514.29%14.29%0.00%
Retailing pharmacy services (not medical)78114.29%14.29%0.00%
Other retailing6.57.5115.38%14.29%-1.10%
Retailing petrol/diesel/cars/vans66.50.58.33%14.29%5.95%
Sport/recreation services7.58.5113.33%14.29%0.95%
Transport/storage related such as couriers, freight, removals and taxis910111.11%14.29%3.17%
Travel agent services9.510.5110.53%14.29%3.76%
Food wholesalers6.57.5115.38%14.29%-1.10%

We then ran a few scenarios for three different industries.

Case Study 1 – restaurantnet salesOutput VATInput VATNet VAT due
Flat rate %Net VAT due
Standard vs flat
Before 4 January 201137,500.006,562.50(1,700.00)4862.5011.0%4,846.8815.63worse off
After 4 January 201137,500.007,500.00– 1,942.865,557.1412.5%5,625.00– 67.86better off
Conclusion – stay at standard rate
Case study 2 – pubnet salesOutput VATInput VATNet VAT due
Flat rate %Net VAT due
Standard vs flat
Before 4 January 201132,500.005,687.50(3,445.00)2,242.506.0%2,291.25– 48.75worse off
After 4 January 201132,500.006,500.00– 3,937.142,562.866.5%2,535.0027.86better off
Conclusion – slightly better off
with move to flat rate
Case Study 3 – advertising firmnet salesOutput VATInput VATNet VAT dueFlat rate %Net VAT dueStandard vs flat
(paying VAT on rent)
Before 4 January 201137,500.006,562.50(2,200.00)4,362.5010.0%4,406.25– 43.75worse off
After 4 January 201137,500.007,500.00– 2,514.294,985.7111.0%4,950.0035.71better 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.