Changes to the VAT flat rate scheme in 2017

Last November, as part of the Autumn Statement, the Government announced changes to the flat rate VAT scheme to be introduced from April 2017.  Full details have not yet been released, but this article is a summary of what has been announced so far.

Essentially the flat rate VAT scheme was introduced to help simplify VAT for many small businesses. However, the Government claims that the flat rate scheme has been abused by many small businesses.  How the scheme was developed has meant that many small businesses make a small additional profit over the course of a year.  The Government plans to eliminate this profit.

Currently under the flat rate scheme a business is allocated a flat rate percentage that it applies to its gross sales figure according to its business sector.  In many cases the flat rate percentage for many small businesses may be as low as 4% or 5% such as for those who may operate a small rural post office. From April 2017, the Government will introduce a new category of trader called a “limited cost trader”.  This category will have a flat rate percentage of 16.5%.  Under new proposals every business registered under the flat rate scheme will need to consider whether they meet the conditions for a “limited cost trader” and will have to use the new 16.5% rate instead.  In many cases it will not be worthwhile continuing to use the flat rate VAT scheme.

A business is deemed to be a limited cost trader if its VAT inclusive expenditure on “goods” (NOT services) is:

  • Less than 2% of its VAT inclusive turnover in a prescribed accounting period
  • Greater than 2% of their VAT inclusive turnover but less than £1,000 pa in a prescribed accounting period (assuming the “prescribed accounting period” is one year).

So if a business has a VAT inclusive turnover of £72,000 (£60,000 +20% VAT) and its expenditure on “goods” is less than £1,440, (2% x £72k) then it is a “limited cost trader” and it will have to apply the new rate of 16.5% on the £72,000 turnover.

Currently HMRC have not disclosed what exactly will come within the definition of “goods”.  Goods are deemed to be items used exclusively for business purposes, excluding capital expenditure, food and drink for consumption in the business, vehicles or fuel (except transport businesses, eg, a courier business).  The big issue for many flat rate scheme businesses is how does HMRC intend to treat costs such as bookkeeping and accountancy services, software costs, telephone and broadband costs from April 2017?

In a few months’ time, we will know more once HMRC issues us with further guidance on the new rules and a clearer definition of what constitutes “goods” for the purposes of a limited cost trader.

Is your business affected by the new rules?  If you would like us to review your business’s position in accordance with the new VAT rules, along with our recommendation as to how you should go forward, we have a low fixed price review of £75 inclusive.

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