Many actors, TV workers and creatives use the VAT Flat Rate scheme; however this is changing from 1 April 2017.
What is the flat rate scheme?
Under the VAT flat rate scheme, a business continues to charge VAT on its taxable supplies but, instead of paying over to HMRC the output tax (less input tax) in the normal way, the business pays an amount equal to the appropriate flat rate percentage of turnover.
Therefore, VAT cannot be reclaimed on purchases except for certain capital assets over £2,000.
To join the scheme your VAT turnover must be £150,000 or less (excluding VAT). You must leave the scheme if you’re no longer eligible to be in it, or on the anniversary of joining, your turnover in the last 12 months was more than £230,000
What are the changes?
The changes have been brought in for those that have very few expenses, which are now being called ‘limited costs traders’. HMRC have finally cottoned on that these businesses are making a nice ‘profit’ on VAT under the flat rate scheme.
Limited cost traders can still use the flat rate scheme, but their percentage will be 16.5% which will no doubt be higher that their current flat rate percentage.
A limited cost trader is defined as one that spends less than 2% of its sales on goods (not services) in an accounting period.
When working out the amount spent on goods, it cannot include purchases of:
- capital goods (such as new equipment used in a business)
- food and drink (such as lunches for staff)
- vehicles or parts for vehicles (unless running a vehicle hiring business)
A business will also be a limited cost trader if it spends less than £1,000 a year, even if this is more than 2% of the firm’s turnover on goods.
What Can Be Done?
A calculation will need to be made to see if you will be a limited cost trader. If so, it might be better leaving the flat rate scheme, but you should contact us first for advice.