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.
- Deregister from VAT altogether – you can do this provided your turnover is below the threshold of £81,000.
- 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.
- 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
77 Victoria Street
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.