Changes to the VAT Flat Rate Scheme

(Last Updated On: 17th May 2017)

If you use the Flat Rate Scheme when reporting and paying VAT to HMRC, and you don’t buy many goods then this could apply to you.

From 1 April 2017 a new Flat Rate Scheme category of 16.5% for ‘Limited Cost Traders’. These are businesses who buy in only a small amount of goods as part of their trade.

The idea is you apply the Limited Cost Traders percentage instead of your normal trade percentage. The change is aimed to tackle ‘aggressive abuse’ of the Flat Rate Scheme (but I suspect will catch other businesses too).

There is a test to see if you’re a Limited Cost Trader and this is set out in online guidance, an extract is below:

“What is a limited cost trader?

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

  • less than 2% of their VAT inclusive turnover in a prescribed accounting period
  • greater than 2% of their VAT inclusive turnover but less than £1000 per annum if the prescribed accounting period is one year (if it is not one year, the figure is the relevant proportion of £1000)

Goods, for the purposes of this measure, must be used exclusively for the purpose of the business but exclude the following items:

  • capital expenditure
  • food or drink for consumption by the flat rate business or its employees
  • vehicles, vehicle parts and fuel (except where the business is one that carries out transport services – for example a taxi business – and uses its own or a leased vehicle to carry out those services)

These exclusions are part of the test to prevent traders buying either low value everyday items or one off purchases in order to inflate their costs beyond 2%.”

There is a further list of items provided by HMRC which can’t be included as goods in this test:

  • any services – which is anything that isn’t goods
  • expenses like travel and accommodation
  • food and drink eaten by yourself or your staff
  • vehicle costs including fuel unless you’re in the transport business using your own, or a leased vehicle
  • rent, internet, phone bills and accountancy fees
  • gifts, promotional items and donations
  • goods you will resell or hire out unless this is your main business activity
  • training and memberships
  • capital items for example office equipment, laptops, mobile phones and tablets

Helpfully HMRC have provided an online tool to do the above test. You can find it here:

https://www.tax.service.gov.uk/check-your-vat-flat-rate/vat-return-period

We recommend you do the test using the online tool and save the result as evidence you’ve considered whether this new rate applies.

And if you’re close to the limit, or the nature of your trade changes, or income and expenses fluctuate, you may need to do this test each quarter.

Unfortunately, this change will mean higher VAT bills for some businesses and likely confusion if they need to apply the new rate or not.

 

Further guidance can be found here:

https://www.gov.uk/government/publications/tackling-aggressive-abuse-of-the-vat-flat-rate-scheme-technical-note/tackling-aggressive-abuse-of-the-vat-flat-rate-scheme-technical-note

 

https://www.gov.uk/vat-flat-rate-scheme/how-much-you-pay

 

 

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