The VAT flat rate scheme is designed to simplify VAT accounting for small businesses. It is open to businesses with a taxable turnover (excluding VAT) of £150,000. Instead of calculating the VAT as normal it is calculated as a percentage of total turnover, the percentage being determined according to business sector.
The government has been concerned that the rate of take-up for eligible businesses has not been high and therefore proposes some changes effective from 1 January 2004. The proposed changes are as follows:
The new rates will range from 2% to 13.5% (1% to 12.5% for new businesses) compared to existing rates of 5% to 14.5%.
New rules are being introduced to prevent VAT avoidance on debts assigned by companies to connected businesses. Businesses that are not paid by their customers can reclaim from Customs the VAT they charged but have been unable to collect. Normally the VAT is repaid to Customs if the business subsequently receives payment from its customer but this rule did not apply where the debt had been assigned.
Where a debt is assigned on or after 11 December 2003 and payment is subsequently received by a connected business to which the debt has been assigned the VAT will have to be repaid to Customs.
Partially exempt businesses calculate the VAT they are entitled to reclaim either using a standard method or by using a special method tailored to their needs. Most businesses use the standard method but where a special method is used it may need to be adjusted when business circumstances change. However changing a special method takes time and Customs are concerned they could lose out. Therefore with effect from 1 January 2004, Customs will have the power to introduce an override with immediate effect.
Customs plans to look at VAT groups with a view to tackling abuses of the rules through artificially contrived grouping arrangements.
Customs will deploy a further 450 staff over the next two years to extend the strategy introduced last year on tackling VAT losses.