VAT change to hit some companies

Some small firms will be able to reclaim less VAT than before

Some small businesses could be worse off as a result of a temporary cut in VAT which comes into force on Monday.

Firms which take advantage of the government's flat-rate VAT scheme will now keep a lower proportion of the VAT they collect from customers.

The change contradicts an explicit assurance in this week's pre-Budget report which said they would benefit.

HM Revenue & Customs said that firms would benefit from paying a lower VAT rate on their expenses.

Flat rates had been changed to avoid giving the firms too much of a tax advantage, HMRC said.

A Revenue spokesperson said: "Some of the firms which take advantage of the government's flat-rate VAT scheme will now only keep a lower proportion of the VAT they collect.

"However they will be having less VAT passed on to them by their customers, and will also pay less VAT on their purchases and expenses.

"Overall all firms will pay less VAT to HMRC as a result of this change."

How it works

Larger businesses charge VAT on their goods or service and then reclaim VAT on their own business expenditure.

I think most people in my position will not have noticed Marketing consultant Adrian Dent

Small firms can opt out of this mainstream scheme and use the flat-rate version instead, relieving them of the time and effort involved in making VAT reclaims.

But the VAT cuts announced mean that for some the amount left over could be less than it was - even with cheaper supplier costs.

Marketing consultant Adrian Dent from Northall in Buckinghamshire, told the BBC that he would be worse off.

Under the flat-rate arrangements, Mr Dent was adding 17.5% to his customers' bills, passing on 11% of the gross amount to the Revenue and allowed to keep the residual net amount of 4.58%.

Under the altered rates which start on Monday he will charge his customers 15%.

But he will be asked to pass on 9.5% to the Revenue and thus keep just 4.08% of this income - half a percentage point less.

"I will be worse off by hundreds of pounds next year," he said.

"I think most people in my position will not have noticed."

However like others in his position, Mr Dent will benefit from lower VAT rates charged by his suppliers.

Slightly worse off

The pre-Budget report said explicitly that people like Mr Dent would in fact be better off under the forthcoming changes.

"The VAT flat-rate scheme allows businesses with a turnover less than £150,000 to simplify their VAT accounting," the report said.

"Alongside the temporary reduction of the standard rate of VAT, the government will also amend the sectoral rates of the VAT flat-rate scheme in line with the standard rate reduction, allowing 180,000 small businesses in the scheme to benefit," it explained.

There are different flat rates for different types of business.

A Treasury spokesperson said no one would pay more tax as a result of changes to flat rates.

But it confirmed that VAT rates for five out the 55 company categories will remain unchanged because they were deemed to be "too generous".

"The new rates in the flat rate scheme fully reflect a standard rate of VAT at 15%," a spokeswoman said.

"Overwhelmingly the rates - which range between 2% and 11.5% - have gone down, and in the remaining cases stayed the same.

"What's more, this is a completely optional scheme that allows businesses to reduce their compliance costs," he added.