VAT Flat Rate Scheme - are you getting the calculation right?

I think it's well known now that the VAT Flat Rate scheme changed with effect from 1 April this year.

The government introduced a new concept of 'Limited cost traders' (LCTs) which have expenditure on 'goods' of less than 2%.

For these LCTs, if they remain on the Flat Rate Scheme they need to use a new Flat Rate of 16.5%. Typically, many will have been management or IT consultants with 'old' flat rates of 14% or 14.5% respectively.

Ok, so that's an increase but it's still worthwhile, right? 16.5% is still less than 20% so it's still possible to make a 'profit' on the scheme? In fact, this is wrong.

Here's the maths:

VAT charged to customers on a net sale of £100. £100 x 20% = £20

VAT payable to HMRC at 16.5% Flat Rate. £120 x 16.5% = £19.80

The key thing here is the Flat Rate percentage is applied to the VAT inclusive amount. 

There is therefore virtually no benefit in remaining on the scheme as an LCT and we have advised all our clients to withdraw and change to standard VAT accounting. Even with very modest expenses which incur VAT, they are likely to be better off if they make this change

I have a suspicion that some businesses are getting this calculation wrong and still feel they gain a benefit using the 16.5% Flat Rate as an LCT. I have no hard evidence for this other than conversations I have had with several business owners who believed the new Flat Rate should be applied to net sales.

Misinterpreting the rules will not be seen as a reasonable excuse by HMRC if the VAT declared and paid is incorrect. 

So please check your calculations. The devil is in the detail and there's a big difference between net and gross sales.

https://www.base52.co.uk/factsheets/vat/vat-flat-rate-scheme