NEWS

Flat Rate VAT Changes for Small Businesses

In his Autumn Statement the Chancellor announced the introduction from this April of a new 16.5% flat rate of VAT for businesses of limited costs or ‘limited cost traders‘ as they are referred to.

From 1 April 2017, businesses will be required to determine whether they meet the definition of a limited cost trader at the same time as establishing their applicable VAT rate, based on their trade sector.  This also applies to existing users of the VAT flat rate scheme.

A limited cost trader will be one whose VAT inclusive expenditure on goods is either:

•    Less than 2% of their gross turnover; or
•    More than 2% but less than £1,000 (or the appropriate proportion of £1,000 for a return period of less than a year - £250 for a standard quarterly return).

It appears that this limit is to be considered separately for each return period.

The 16.5% flat rate is so close to ‘output tax on a standard-rated supply’ that it saves only £200 on £100,000 of net standard rated turnover.  This means a limited cost trader with VATable expenses on services (not goods - see note below) of more than 1% of net turnover will be worse off financially, under the Flat Rate Scheme.  

Note that only goods count, not services.  Also excluded are capital expenditure goods, food or drink for consumption by the flat rate business or its employees, vehicles, vehicle parts and fuel (except for businesses who carry out transport services) and anything that is not used exclusively for business purposes.

Example

Current scheme
The flat rate percentage for a clothes shop is 7.5% - so if the owner of the shop sells a dress for £120 including VAT of £20 he will pay a flat rate of £9 (£120 x 7.5%) to HMRC.

New scheme
The flat rate percentage for limited cost traders will increase to 16.5% so if they sell £120 of work, including £20 of VAT the flat rate amount is £19.80.

Businesses should also be aware of the anti-forestalling legislation published in November to prevent any trader from continuing to use a lower flat rate by issuing an invoice or receiving a payment before 1 April 2017 for services supplied after that date.

If you would like us to review your use of the Flat Rate Scheme and help you decide if you should stay in please let us know.

03/01/2017