VAT thresholds

• the threshold for compulsory registration is £56,000
• the threshold for voluntary deregistration is £54,000.

Flat rate scheme

An optional flat rate scheme was introduced in April 2002 for businesses with a tax exclusive annual turnover of up to £100,000. Traders joining the scheme avoid having to account for VAT on all the individual goods they buy and sell. Instead they calculate their net VAT liability as a percentage of their total turnover (including any exempt income). The flat rate percentage applied depends on the trade sector into which a business falls for the purposes of the scheme and is between 5% and 14.5%.

The scheme is extended with effect from 10 April 2003 to businesses with an annual turnover of up to £150,000. Over 650,000 businesses will be eligible for the scheme as a result. The government is keen to raise awareness of the scheme and will look at other ways of extending it.

Comment

The scheme has not taken off in the way that the government had hoped. This is due at least in part to the fact that, for a number of reasons, the scheme is not beneficial for all businesses. Particularly in situations where the flat rate percentage is at the upper end of the range and where there is exempt income it may be cheaper to continue to compute VAT in the normal way.

VAT and freehold buildings

The sale of a freehold building is liable for VAT during the first three years of the building’s life. However companies have been exploiting a loophole which allows them to pay VAT at the point of payment rather than the point of sale. The loophole involved companies arranging sales of freehold buildings through associated companies thereby delaying the bulk of the payment until after the end of the three year period and avoiding VAT. This loophole has now been blocked as payments made after the end of the three year period will be standard rated.

VAT: other measures

• The annual accounting scheme allows businesses to complete one VAT return a year instead of the usual four. The turnover limit for immediate entry to the scheme will be raised to £150,000 with effect from 10 April 2003.
• A late registration incentive scheme will be introduced from 10 April until 30 September 2003. Where a business registers late but remains compliant for 12 months after registration then the penalty liability which would have arisen will not be issued.
• New rules on evidence for input tax deduction without a valid VAT invoice will be introduced from 16 April 2003 after a limited consultation. The rules will only affect businesses that operate in trade sectors dealing in computers, telephones, alcohol and fuel.
• The bank guarantee requirements for the operation of the Duty Deferment Scheme for imports will be relaxed from 1 December 2003.