NEWS

What is the VAT Flat Rate Scheme?

The VAT Flat Rate Scheme for small businesses is a simplified scheme which allows eligible traders to calculate the VAT that they pay over to HMRC by reference to a fixed percentage applied to gross
(i.e. VAT-inclusive) turnover. Businesses with VAT taxable turnover of £150,000 a year or less can join the scheme.

Prior to 1 April 2017 the flat-rate percentage was determined solely by reference to the trade sector in which the business operated. From 1 April onwards, it is also necessary to consider whether the business meets the definition of a ‘limited cost trader’. Where a company is a ‘limited cost trader’ the VAT that must be paid over to HMRC is at worked out using a higher rate percentage of 16.5% of gross (VAT-inclusive) turnover for the period, rather than the percentage for the relevant business sector.

A limited cost trader is one that spends less than 2% of its VAT-inclusive turnover on ‘relevant goods’ or one which spends more than 2% of its turnover but less than £1,000 a year on relevant goods. The 2% test must be applied for each VAT quarter. The test is a harsh one as it only takes account of expenditure on goods, not on services. Consequently, if a business spends a lot on VATable services but not much on goods, it may be classed as a limited cost business and may lose out in terms of recovering the VAT incurred on services.

18/10/2017