VAT'll do nicely

By NATASHA MUKTARSINGH
Updated:

 

FOR millions of small businesses, filling in VAT returns is a nightmare. It's fiddly, time-consuming and irritating. But in last week's Budget, Gordon Brown announced important changes that will allow half a million of Britain's smallest businesses to opt for a far simpler system.

Instead of recording VAT on individual sales and purchases, from Thursday, they will be able to pay the tax at a flat rate, based on annual turnover.

Small Firms' Minister Nigel Griffiths said: 'This is the first time a Budget has said that small and medium-sized enterprises are the foundation of the economy.

'The VAT flat-rate scheme has removed one of the biggest burdens and will allow small firms to spend more time winning and serving customers. This is only the beginning for cutting red tape.'

The scheme applies to companies with sales of £100,000 or less. The rate a firm pays will vary according to its sector. For example, newsagents will pay four% of turnover in VAT, pubs and courier firms will pay 6%, while chemists and car showrooms will pay 8%.

Printers will pay VAT of 8.5% of their turnover, while publishing, photography and taxi companies will pay ten%. Paying the top rate of 14.5% will be computer consultancies.

Defining which sector a company falls into is not simple. Where a firm has business in more than one sector, the company will use the percentage rate that applies to the biggest part of its business.

But firms will not be forced to use the new system. If they think they could pay less tax by using the conventional scheme, they can stick with that.

A spokesman for Customs & Excise said: 'You can take the amount of VAT you paid last year and compare this with what you would pay under the new system to make a choice. The scheme is optional.'

Joanna Marshall, 26, runs her own business in Nottingham designing and making ties. With a maximum expected turnover of £90,000 this year, she will be able to take advantage of the new scheme.

She said: 'I think this is an excellent idea for small businesses. I set up my company two years ago and there is a lot to learn. Taking away a burden like this will make a big difference.'

Paying the 9.5% rate applying to clothing manufacturers means her annual bill will be £8,550.

Adrian Haustoun, VAT specialist at accountant Kingston Smith, said: 'We have a small computer sundries retailer with a turnover of £95,000 which will save £1,750 under a new rate of seven% for retailers.

'The more costs a business has, the less likely it is to benefit financially. But firms also need to take into account the cost of doing a VAT return compared with making one simple calculation.'

Robert Aziz, a partner at accountant BDO Stoy Hayward, added: 'Companies still have to do the sums to see if they are worse off, so it doesn't lessen the need for record-keeping or necessarily save any time.'

Other Budget measures for small firms included:

• A cut in the small companies corporation tax rate - covering profits from £50,000 to £300,000 - from 20p to 19p;

• A cut to zero in the rate of tax on profits of less than £10,000;

• Automatic VAT relief on bad debts outstanding for more than six months;

• The VAT registration threshold increased from £54,000 to £55,000;

• Automatic fines on the late payment of VAT abolished;

• Cash assistance to help small firms put payroll systems online;

• Financial support for small firms allowing low-skilled staff to take time off for training.

• For details of the new VAT scheme, click here.

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