Registered for VAT? 4% Flat Rate increase for authors from April

3 February 2017

A new Flat Rate VAT regime is likely to see authors’ contributions increase from 12.5% to 16.5% from the beginning of April.  How will this affect you and what are your options?

In last year’s Autumn Statement, the Chancellor announced several changes to the tax system for self-employed people.  While some proposals have yet to be fully debated and, if they go ahead, won’t come into effect until April 2018, changes to the VAT Flat Rate will go ahead as planned from this April.

The VAT Flat Rate Scheme was originally introduced as a means of simplifying the completion of VAT returns for smaller businesses.  Once registered, instead of having to offset VAT charged against VAT paid in expenses, the amount you pay is based on a fixed percentage of turnover.

HMRC set different fixed percentages based on occupations and business activities, calculating the average costs in each sector and coming up with a flat rate that was applicable to all.  With flat rates ranging from 4% to 14.5%, it was more generous to some sectors than others.

The ‘Entertainment or journalism’ rate of 12.5% (11.5% in the first year) has generally left authors better off using the Scheme rather than accounting for VAT on the normal basis.  Authors without literary agents have been particularly well off under the scheme.

The new measures introduce a new 16.5% rate for businesses with limited costs.  A “limited cost trader” is defined as one whose expenditure on goods is less than 2% of VAT inclusive turnover, or is more than 2% but less than £1,000 per year.  In order to prevent a business inflating costs, certain low value everyday purchases are excluded from the definition of goods, as is capital expenditure (which for those on the FRS includes goods which have a life span of over a year, such as a tablet or office desk).

In reality, it is anticipated that most authors will be limited cost traders and will therefore have to use the new rate of 16.5% from 1 April, increasing the amount you must pay by £400 for every £10,000 + VAT that you earn.

Understand your options

The same solution won’t suit everyone. HW Fisher & Company accountants suggest the following options.

  1. Deregister from VAT altogether – you can do this provided your turnover is below the threshold of £81,000.
     
  2. Deregister from the Flat Rate Scheme from 1 April but continue to be VAT registered. This will remove the benefit of simplification but leave you able to claim back any VAT on expenses.
     
  3. Carry on under the VAT Flat Rate Scheme using the 16.5% rate.

Any changes to your VAT status, such as options 1 and 2, must be requested by writing to:

HM Revenue and Customs
Imperial House
77 Victoria Street
Grimsby
Lincolnshire DN31 1DB

We recommend you do this as soon as possible to make sure it can be processed before the end of March. Request a deregistration or changeover date of 31 March.

Don’t forget that as a member you are entitled to use the free tax helpline of HW Fisher and their dedicated Authors and Journalists Team. Sign in to the members’ area of our website for more details.

Read a full breakdown of recent tax changes in The Bookseller.

COMMENTS

Anne Rooney (01/04/2017 07:34)
" Further to the issue of whether the 16.5% is paid on pre- or post-VAT amount, this is from the HMRC website:

'Apply the flat rate percentage to the VAT inclusive supplies for which you have been paid in the accounting period.'

https://www.gov.uk/government/publications/vat-notice-733-flat-rate-scheme-for-small-businesses/vat-notice-733-flat-rate-scheme-for-small-businesses

and again:

'At the end of the VAT period you add up the VAT inclusive total of all your supplies whether you gave a VAT invoice or not and apply the flat rate percentage to this total to give the amount of VAT you must pay to HMRC.'

https://www.gov.uk/government/publications/vat-notice-733-flat-rate-scheme-for-small-businesses/vat-notice-733-flat-rate-scheme-for-small-businesses

So if you invoice £1000+VAT=£1200, you pay the flat rate on £1200 NOT on £1000. (This means you pass on £198, keep £2 on which you pay income tax.) Bit worried about the accountancy firm you're using now."
Anne Rooney (01/04/2017 07:18)
" Claudio, it's a shame SocA haven't answered your question. I think you need to offset the cost of the accounting against how much VAT you will be able to reclaim. If you can reclaim £400 a year but have to pay your accountant £100 a quarter to do the VAT return (if you don't do it yourself) then you have not saved anything and might as well de-register.

Unless SocA can think of a reason for staying registered?"
Claudio Munoz (16/03/2017 03:12)
" My accountant has advised me to leave not only the Flat Rate scheme, but opt out of VAT altogether. Would it not be at least marginally profitable for an illustrator/author like myself to continue with VAT as I have chosen to do? Before joining Flat Rate I used to save 2 to 4 hundred pounds a year, which was better than a poke in the eye."
Sean McManus (03/03/2017 09:34)
" (when I said income tax, I was speaking as a sole trader)."
Sean McManus (02/03/2017 11:22)
" Thank you for this article - it's a huge help.

I wanted to say, though, that Anne is correct in her calculations. The VAT payable under the flat rate scheme is calculated on the gross including VAT, not the net (the pre-VAT value of the work). The figures in the article would be correct if the VAT paid to HMRC was based on the £10,000, but it's actually based on the £12,000.

It's also worth noting that income tax is due on the VAT you retain under the flat rate scheme. This isn't a new thing, but it's not something I see mentioned many places, and it further reduces the amount of VAT retained (see 7.8 in VAT Notice 733). The retained VAT is supposed to fairly reflect the input VAT foresaken, so at a flat rate of 16.5%, I imagine most people would be better off not using the flat rate."
Martin Reed (21/02/2017 03:37)
" Thanks for your comments, Anne. We confirmed the figures with the VAT adviser at HW Fisher accountants, so we can only presume they're correct. I think they're based on 12.5% vs 16.5% of the £10,000, not of the £12,000.

As for how to know whether you're a 'limited cost trader', it's worth calling our tax helpline. They'll have a better idea of what's likely to happen if you file under one category but it turns out later you should be under another. From what we've heard, even HMRC's own advisers haven't got full guidance on how certain criteria will work, which doesn't exactly help..."
Anne Rooney (20/02/2017 02:01)
" PS - I think you have the calculation wrong: we actually pay an extra £480 per £10,000 and get to keep only £20:

Inv £10,000, charge £2,000 VAT = £12,000
Pay on VAT of 12.5% of TOTAL £12,000 (not of the £10,000) = £1,500 (keep £500)
Pay on VAT of 16.5% = £1,980 (keep £20)"
Anne Rooney (20/02/2017 01:47)
" How are they going to know if we are 'limited cost traders'? Especially with all those conditions and provisos. My expenses last year were many times £1000, but I don't know which would count for VAT purposes and there is no way they can know they count as - being flat rate - I don't have to do any kind of breakdown. And for HMRC I opt for the summary rather than the breakdown option. I presume they just have to trust us?"
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