Smarter accounting

VAT Flat Rate Scheme for Advocates

18 March 2017, Advocates, Barristers

The VAT Flat Rate scheme for advocates is changing along with all other Limited Cost Traders on 1st April 2017.  The scheme was introduced with the intention of simplifying VAT.  It was never intended to be a tax allowance or a way of saving VAT.  The assumption from HMRC was that the scheme would be broadly revenue neutral.

For many businesses in the service sector, purchases are minimal so the Flat Rate Scheme has been used for a cash benefit rather than as a simplification of VAT.  This is perceived as being “unfair to those businesses not entitled to use the scheme”.

In the Autumn Statement on 23 November 2016, the Chancellor of the Exchequer announced the introduction of a new 16.5% VAT flat rate for businesses with limited costs.  The stated purpose of this change is to tackle “aggressive abuse of the VAT Flat Rate Scheme”.  This language might seem to be a little unfair.  Many of the rates including the VAT Flat Rate scheme for advocates (14.5%) are populated almost exclusively by Limited Cost Traders, who are now being accused of “aggressive abuse”.

Advocate's wig on tin with library in background

What is a limited cost trader?

A limited cost trader is defined as one whose VAT inclusive expenditure on goods is either:

  • less than 2% of their VAT inclusive turnover in a prescribed accounting period
  • greater than 2% of their VAT inclusive turnover but less than £1,000 per annum if the prescribed accounting period is one year (if it is not one year, the figure is the relevant proportion of £1,000)

Goods, for the purposes of this measure, must be used exclusively for the purpose of the business but exclude the following items:

  • capital expenditure
  • food or drink for consumption by the flat rate business or its employees
  • vehicles, vehicle parts and fuel (except where the business is one that carries out transport services – for example a taxi business – and uses its own or a leased vehicle to carry out those services)

These exclusions are part of the test to prevent traders buying either low value everyday items or one off purchases in order to inflate their costs beyond 2%.  Expenditure on services including software, accountancy fees, commission etc. are not counted as part of the costs for the purposes of deciding if you are a limited cost trader.

Most business on the Flat Rate Scheme will submit VAT returns on a quarterly basis.  They would therefore need to check their purchases every quarter to make sure they are still eligible to be in the scheme.  HMRC do not expect many traders to be on the threshold of being a limited cost trader, but it is possible for a trader someone using the VAT flat rate scheme for advocates to apply 14.5% to their gross turnover one quarter and 16.5% the next.

Leave VAT Flat Rate Scheme for Advocates

In practice, advocates along with other limited cost traders will spend far less than 2% of their gross turnover on qualifying goods.  This means that to stay on the flat rate scheme would cause advocates to decrease their pre-tax profits by 2% of their turnover as their flat rate increases from 14.5% to 16.5%.  FSL fees and commission are subject to VAT at 20% so all advocates incur input VAT that could be reclaimed by the standard scheme for VAT.  Advocates at all levels of income would be better off changing to the standard scheme for VAT.  The higher the turnover the greater the benefit of switching to the standard scheme.

Deregister for VAT

It is an option for limited cost traders to de-register for VAT.  From 1st April 2017 the VAT registration threshold is £85,000 per annum.  If your annual turnover is (or expected to be) below £85,000 you do not have to register for VAT in the first place.  If you are currently registered for VAT, the de-registration threshold from 1st April 2017 will be £83,000.

Voluntary registration for VAT

Even if your turnover is below £85,000 you are likely to benefit from voluntarily registering for VAT.  Once VAT registered you will be able to reclaim input VAT on purchases including FSL fees, which will save you cash.  Organising your accounts for VAT returns requires additional effort and is likely to increase your accountancy fees, but this will be offset by the input VAT reclaimed.

It may be tempting for a newly called advocate to ignore VAT and remain un-registered.  It is important to consider that at some point your turnover may exceed £85,000 at which point you will be obliged to register for VAT.  This could mean that you would have to retrospectively register for VAT and go back to invoices already processed and ask your agents to add VAT to fees already paid.

For advice on registering for VAT or leaving the Flat Rate Scheme, please contact Alterledger using the form below.

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