Small businesses need not bear full VAT burden say accountants

SMALL businesses in the West Midlands may not have to suffer the full impact of the VAT rise if they operate a flat rate scheme, accountants have said.

Flat Rate Schemes are designed to ease the burden of VAT accounting for small businesses by enabling a firm to supply its customers while charging the full tax rate but then paying a much lower rate to HM Revenue & Customs and then keeping the difference.

The rate a business pays to HMRC depends on the type of trade carried out.  On an invoice of £600 plus VAT of £120, a vehicle repair business would pay a VAT rate of 8.5% giving it a saving of £69, whereas an IT consultant would pay 14.5%, giving a saving of £33.
 
Neil Dawson, associate director of VAT at RSM Tenon in Birmingham, said: “For once there is some good news for businesses.  Those operating under a Flat Rate Scheme are unlikely to feel the full impact of the headline increase in VAT because while they will be charging their customers the new rate of 20%, they will be paying the lower rate to HMRC, and, in effect, pocketing the difference.

“We urge all small businesses not currently operating under a flat rate scheme to consider the merits of doing so.  Businesses that benefit from using this scheme are those with an annual turnover of less than £150,000 and with little or no overheads.”