VAT Flat Rate Scheme changes, may impact small businesses in the coming months.

February 1, 2017

Following the Chancellor of the Exchequer’s announcement in the Autumn Statement back in November 2016, significant changes to the VAT Flat Rate Scheme may impact small businesses in the coming months.

The VAT Flat Rate Scheme is an accounting scheme for VAT which has been simplified from the usual VAT process and is essential for small businesses. Under this scheme, the amount of VAT due to HMRC is based on gross sales (inclusive of VAT) multiplied by a flat rate percentage (lower than the standard rate of VAT of 20%) which is set by HMRC and is specific to the sector in which the business operates in. In this scheme, the business is not able to reclaim VAT on purchases unless they are for high value capital goods. The lower percentage in this scheme is to, in effect, try to represent the net VAT the business would need to pay to HMRC if they followed the usual VAT process.

However, from 1 April 2017, flat rate scheme businesses must also determine whether they meet the definition of a limited cost trader, which will be included in new legislation.
Businesses using the scheme, or thinking of joining the scheme, will need to decide whether they are a limited cost trader and, if so, they should use a new 16.5% rate irrespective of what sector they operate in.
Businesses using the scheme will be expected to ensure that, for each accounting period, they use the appropriate flat rate percentage.

The draft legislation defines a limited cost trader as one whose VAT inclusive expenditure on goods is either:
• less than 2% of their VAT inclusive turnover in a prescribed accounting period; or
• greater than 2% of their VAT inclusive turnover but less than £1,000 per annum if the prescribed accounting period is one year (if it is not one year, the figure is the relevant proportion of £1,000)

Goods, for the purposes of this measure, must be used exclusively for the purpose of the business but exclude certain 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)

Further information regarding the proposed changes can be found on HMRC’s website below:

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

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