MANY service providers will lose the cash benefit of the VAT flat-rate scheme from April, the Chancellor announced in the Autumn Statement.

The scheme is used by numerous small businesses to simplify their VAT reporting. Many also gain a cash advantage from using the scheme, but this advantage is due to be cut back significantly from April 1.

The scheme will continue but many businesses will find it uneconomical.

When using the flat-rate scheme the business ignores VAT incurred on purchases when reporting VAT payable, with the exception of capital items which cost £2,000 or more.

The trader simply multiplies its gross turnover (including VAT at 20 per cent) by the flat-rate scheme percentage set for the trade sector.

This scheme percentage is supposed to take account of the VAT likely to be incurred on business expenses. The common percentages used by service-related businesses are accountancy and legal services (14.5%), journalism or entertaining (12.5%), computer or IT consultancy (14.5%), business services not listed elsewhere (12%), estate agents and property management (12%), management consultancy (14%).

If the business incurs few expenses, and it operates in a sector with a relatively low flat-rate scheme percentage, it will pay out less VAT to HMRC under the scheme than it would outside the scheme.

Many businesses register for VAT voluntarily before their turnover reaches the VAT registration threshold, so they can use the scheme and bank the cash advantage.

The Government believes small businesses have been abusing the scheme by not using it as the law intended, so it is changing the terms of the scheme to make is less attractive to use, and to reduce the cash advantage enjoyed by service-related businesses.

From April 1, a business will be required to use a flat-rate scheme percentage of 16.5 per cent if it is a “low-cost trader”.