VAT reduction

vivatifosi

I'm also worse off as a result of the changes, though both my income and expenditure are variable so its not as easy to give a figure as to by how much.

Pennywise

Many smaller businesses will be using the VAT flat rate scheme, and surprise, surprise, the rates havn't reduced by the full 2.5% - most rates have reduced by about 1.5% and some rates havn't reduced at all.

For example, pubs, post offices and most small retailers such as convenience stores, newsagents, etc using the flat rate scheme continue to use the same rate.

So when you go into your local corner shop for your packet of fags and a mars bar, don't blame the shop-keeper when the price hasn't come down!

Slinky

Mine was reduced by 1%. However my business is the sort where I am quoting rates plus VAT on top, instead of a gross rate inc. VAT so I'm just going to have to take the loss.

gax23

Slinky wrote: »

Thanks Mr Darling, I'm over £100 a month worse off now. Don't think the postponement of corp tax will do much to improve things.

How so? VAT changes won't make any difference to businesses as you pay all VAT back to HMRC anyway.

Slinky

gax23 wrote: »

How so? VAT changes won't make any difference to businesses as you pay all VAT back to HMRC anyway.

Not on the flat rate scheme you don't. You invoice net rate plus 17.5% (soon to be 15%), then pay away a set percentage of your turnover depending on what industry you are in. My percentage I pay to Mr VATman dropped by 1% not 2.5%, so I'll be worse off.

dawsinho

i'm also worse off! cheers darling!

koru

Note that you are not worse off just because your flat rate did not reduce by 2.5%. Although it may seem counter to intuition, in fact, 1.5% is about right.

For instance, if you were on the 11% rate for "other businesses" it has reduced to 9%. That is a 2% drop, compared to the 2.5% drop in the invoice VAT rate, but this does not mean that you are 0.5% worse off.

Under the old rates, for every £100 of pre-VAT sales you would bill 117.5 and you paid 11% of that to HMRC, leaving you with 117.5x89%=104.575. That is the £100 of pre-VAT sales, plus £4.575 "profit" on the VAT. This is not really profit, because it is intended to cover the input VAT (the VAT you paid on your expenditure). Of course, your actual inputs may be higher or lower than this, but that is beside the point for this discussion.

Under the new rates, you bill 115 and pay 9% to HMRC, leaving you with 115x91%=104.65. Therefore, you have slightly more VAT "profit", of £4.65, so you seem to be a little better off than before.

But we also need to take into account that your input VAT will have reduced from 17.5% to 15%. So (assuming your suppliers reduce their prices after VAT), if you were previously incurring £4.575 of VAT on your expenditure, you will now be incurring 4.575x15/17.5 = £3.92 of VAT, but the government is giving you £4.65 with which to pay it. So, you are actually making a real £0.73 profit.

In fact, to have kept you as well off under the FRS as before, the 11% rate should have reduced to 100-103.93/115=9.6%.

That is, a reduction of 1.4% would have been sufficient to keep you square. The calculations will be slightly different for other flat rates and other proportions of input VAT, but I think the only ones who probably lost out are those whose rate dropped by less than 1.5%. And even those have probably lost out by less than their intuition suggests.

koru

If you are struggling to understand why the intuitive answer is wrong, it is because there are three factors to take into account. Not only has the bare flat rate % fallen, but the figure to which it has applied has also fallen (from 117.5% to 115%). This increases the benefit. And the VAT suffered on purchases and overheads has also dropped, so your costs have fallen (or should have).

Pennywise

FRS retail traders are worse off, especially due to the timing. They've already bought their christmas stock and paid 17.5% vat on it. Now, they're expected to sell it at a lower price. Virtually all their sales over the next 4 weeks to xmas will be for stock bought at 17.5%. It will only balance out as suggested when they buy new stock, which is fairly unlikely at this time of year as they won't be stocking up straight after christmas, especially in recession. They may benefit slightly in Jan 2010 if they put up their prices again for stock they bought at 17.5% but they're unlikely to be selling much in a January anyway.

I've just been working through this scenario with shop who bought all their christmas stock in the Autumn. They're definitely going to be a lot worse off if they reduce their selling prices - they're working to low margins anyway, and this change actually pushes some items into loss if they reduce prices as GB/AD want them to. I'm currently working flat out trying to see if they'd be better leaving the FRS and going back onto the normal scheme - it looks as if they will be - so much for simplification - I think this change will push a lot of the smallest businesses back onto the normal VAT schemes.

vivatifosi

I understand your point koru, but won't those who were sold the small business scheme on the ground that their input costs were low so they would be better off also be hit?