While small businesses may welcome cuts to business rates announced in the Autumn Statement, the higher percentage rate on the Government’s flat rate VAT has left the small business community reeling.

Due to be introduced in April 2017, the new rate of 16.5% is anticipated to deter SMEs and freelancers from relying on the scheme, in light of the belief that it is being used inappropriately.

Executive Chair of the Federation of Small Businesses (FSB) Mike Cherry was pleased with the business cuts plans, as the organisation had been campaigning on this issue for many years, but said the phasing out of the scheme was going to have a big impact.

“We welcome the government’s attempts to clamp down on any misuse of this scheme by a small minority of businesses that use it. However we would be concerned if any small businesses who play by the rules now end up having to pay more to remain within the scheme.”

How does the current flat rate scheme work?
VAT is deductable on what a business buys and what it sells, whether this is goods or services.

To make things easier for small business which may not have the benefit of a dedicated accounting department, this two stage calculation is merged into one process.

The rate itself depends on the business, but is designed to give the government roughly the same amount of VAT. For example, HMRC lists Post Offices under a 5% rate, while lawyers and legal services are higher at 14.5%.

However, many businesses currently benefit from between 9% – 12%, so the increase to 16.5% is going to represent a significant, if not unmanageable, jump.

Emma Jones of Enterprise Nation voiced her concerns and criticism around the decision.

“These are business owners who pay their taxes and commit every day to making their business better – and in turn improve their local economy and community,” she said,

“Which is why it was such a shock to see our Chancellor stand today in Parliament and associate the self-employed with avoiding tax. The ‘inappropriate use’ of a VAT flat rate scheme introduced to help small businesses is being shut down.”

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