From April 2017, the Government is introducing a new 16.5% Flat Rate VAT scheme that many ‘labour-only’ businesses, such as contractors, will have to move to. This will reduce some of the benefits of Flat Rate VAT for many self-employed firms, but it will still be more cost-effective than not being in the scheme.

Due to the way the Flat Rate scheme rates are set (e.g. 14% for business consultants), if you’re caught by the new rules you’ll end up paying more VAT (so a business consultant would pay an extra 2.5% of VAT).

So should you Leave the Flat Rate VAT Scheme?

The yardstick for leaving the FRS is surprisingly simple:

• Do you spend more than 1% of your turnover on VAT-able goods and services?

If ‘yes’, it’s likely you’ll be better off moving to the standard VAT scheme.

It’s going to come down to the type of business you’re running. If you’re flying close to IR35, with minimal outgoings bar mileage and sustenance, then the chancellor has you in his sights. You’re unlikely to be better off on the standard VAT scheme, and you’ll feel the brunt of April’s FRS rate rise.

If, on the other hand, you’re running a service business which looks, feels and acts like a consultancy firm, then you’re likely to be better off moving to the standard VAT scheme. If I look at the client base of our accountancy practice, the majority of clients fall into this camp, with average outgoings approaching 9% of turnover.

As for the practicalities of leaving the Flat Rate Scheme, it’s straightforward. Simply ask your accountant to write to HMRC; it’s a quick and pain-free process. That’s assuming you’re using an app or online accountant to keep accurate records of outgoings — if not, this could be the perfect (and financially beneficial) time to implement electronic record keeping.

Our consultants are also available to speak to you on your specific needs.