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Autumn Statement

How the VAT Flat Rate Scheme changes will affect you

In a week when Prime Minister Theresa May spoke at the CBI conference reassuring UK business of the government’s “unashamedly pro-business” agenda, it was Chancellor Philip Hammond’s turn to deliver his much-awaited first major financial statement on 23 November.

We examine the key points and the impact on contractors.

VAT Flat Rate Scheme Changes

During Mr Hammond’s Autumn Statement 2016 he announced changes to the VAT Flat Rate Scheme (FRS). A new 16.5% flat rate percentage for businesses with limited costs will take effect from 1 April 2017.

Currently businesses determine the flat rate percentage to use based on the type of trade/services they provide. From 1 April 2017, Flat Rate (FRS) businesses must also determine whether they meet the definition of a “limited cost trader”.

A limited cost trader is:

  • A business where its VAT inclusive (Gross) expenditure on goods is less than 2% of its VAT inclusive (Gross) turnover in their accounting period.
  • Greater than 2% of its VAT inclusive (Gross) turnover, but less than £1,000 per year if the accounting period is one year

The definition of “goods” must be exclusively for the purpose of the business but excludes the following:

  • Capital expenditure (i.e. computer purchase)
  • Food or drink / subsistence

Please find below an illustration of how the measures will affect your business, and the profits available to shareholders based on you currently operating a Flat Rate VAT % of 14.5%, VAT exclusive turnover of £100,000, with no costs:

 

Pre 01 April 2017
£
Post 01 April 2017
£
Net Sales
100,000
Net Sales
100,000
VAT @ 20%
20,000
VAT @ 20%
20,000
Gross Sales
120,000
Gross Sales
120,000
VAT @ 14.5%
17,400
VAT @ 16.5%
19,800
Difference
Profit retained
2,600
Profit retained
200
2,400
CT @ 20%
520
CT @ 20%
40
Dividend available
2,080
Dividend available
160
1,920


As illustrated above your business will be £2,400 worse off under the new measures leaving the shareholders with £1,920 less to distribute in way of dividends.

Public sector IR35 woes for contractors

The grim news for contractors is that the IR35 proposed public sector changes announced in the 2016 Budget will go ahead. Although only alluded to by Hammond in his speech, the Autumn Statement documents confirmed contractors’ biggest fears with the government firmly setting its sights on recouping an estimated £400m that Personal Service Companies (PSCs) outside IR35 save annually. In a double blow, the 5% administration allowance for expenses in running a business has also been scrapped.

The big fear is that public sector engagers could now bring many freelancers inside IR35, effectively removing the extra administrative burden of assessing for IR35 status via the proposed Real Time Information (RTI) tax collection and reporting process obligations. Limited company contractors could now be treated as employees but without any of the employment rights reserved for permanent workers.

Although this may seem like bad news, many industry representatives and businesses are already developing processes which will help to ensure contractors are not forced out of the public sector, so it is important not to panic.

Demand for construction and engineering contractors

Hammond did deliver on the government’s infrastructure investment promises, launching the new National Productivity Investment Fund (NPIF) with £23bn of public money earmarked on supply side policy measures. These include upgrades to transport networks, such as roads and railways as well as an increase in the housing stock and extra funds for Research & Development.

Over £5.4n has been dedicated to the housing sector for the construction of new and affordable homes. This will create numerous opportunities across a range of disciplines, with construction, engineering and maintenance contractors the main beneficiaries. There will also be demand for electrification experts as well as railway digital signalling specialists (£450m has been set aside for this). Highly qualified teams of flood defence specialists will also be needed to deal with the environmental damage.

R&D funding will rise by £2bn per year to maintain the UK’s status as the technology hub of Europe. There will be buoyant demand for digital communications contractors – £1bn will help support the rollout of full fibre broadband and trials of 5G mobile. The big tech giants – Google, Apple and Facebook – have all recently announced plans for new HQs in London, confirming their commitment to grow their UK workforce. Highly sought after software engineering contractors will be first in line for assignments.

The Autumn Statement didn’t throw up any surprises for contractors. The ‘Off-payroll working in the public sector – reform of the ‘intermediaries legislation’ reforms will become law from April 2017 and private sector contractors will feel that they could be targeted next. The billions in investment that have given the economy a much-needed fillip will create lots of opportunities for skilled contractors – some consolation perhaps.

So there may be some positive news – but Phillip Hammond’s first (and last) Autumn Statement has not brought much Christmas cheer to public sector contractors.

Further legislation is due to be published on 5th December 2016 and we will continue to keep you up to date on how this may affect your business.

Should you have any queries regarding the Flat Rate VAT Scheme or any other measure announced in the Chancellor’s Autumn Statement, please do not hesitate to contact us.