Warr on...

The recent reduction in the rate of Value Added Tax (VAT) was accompanied by a lower reduction in the rates applicable to the Flat Rate Scheme. Here we consider whether the failure to pass on the full reduction was justified or whether it represents a stealth tax.

As an example we look at the rate applicable to Management Consultants. On 1st December this dropped from 12.5% to 11%. Using a turnover figure of £80,000, VAT @ 17½% amounted to £14,000 and at the flat rate of 12½% it was £11,750. This means that deemed input VAT was £2,250 (£14,000-£11,750). Using the 17½% rate this would equate to net inputs of £12,857 (£2,250÷17½%).

Now looking at the new rates, VAT @ 15% on turnover of £80,000 amounts to £12,000 and VAT @ 15% on the input figure of £12,857 calculated above amounts to £1,929. And so, one would expect that the flat rate would amount to about £10,071 (£12,000-£1,929) and the calculations at the new flat rate of 11% on gross turnover of £92,000 in fact yields £10,120.

The conclusion is that a reduction of just 1.5% in the flat rate compared to a 2.5% reduction in the headline rate is probably not unreasonable.

It is to be hoped, however, that the flat rates will return to their previous levels when the headline rate goes back up to 17½% on 1st January 2010.

If you wish to discuss this article, please do not hesitate to contact Tim Warr or Peter Edwards.

Date of Article: 17th December2008