VAT Flat Rate Scheme – changes from 1st April 2017
In his autumn statement, the Chancellor announced a major change to the Flat Rate Scheme which we believe will have an impact on many businesses using the scheme. This is being implemented as the Government believes that the Flat Rate Scheme has been abused by businesses for tax saving rather than for the administrative time saving it is intended for.
HMRC have introduced the concept of a “limited cost trader” for which a new Flat Rate of 16.5% applies on gross sales, rather than the previous sector-specific lower rates. Bearing in mind that the VAT on a gross sale on normal VAT accounting is 16.67%, the saving under the Flat Rate Scheme is now marginal. In many cases, it is likely that it will be beneficial for a business to leave the Flat Rate Scheme and adopt the cash accounting scheme as whilst it will then be paying 16.67%VAT on gross sales (20% net), it can recover input VAT on the relevant expenses it incurs.
A limited cost trader is defined as any business who purchases goods of less than 2% of its Flat Rate Scheme gross turnover or greater than 2% but less than £1,000 (gross of VAT) per year. This only relates to goods, i.e. items that are physical and tangible. Services, such as accountancy and legal fees, are not included within this calculation nor are subsistence costs or costs relating to motoring (e.g., fuel or car parts).
Capital expenditure does not count towards the calculation above but the same rules apply for recovery of VAT as under the old rules of the Flat Rate Scheme. Namely that VAT can be recovered on a capital item as long as it costs over £2,000 (gross).
One of the rules of the new regime is that a trader who stays within the Flat Rate Scheme needs to perform a check quarterly and if the qualifying costs are above £250 or 2% of gross turnover, they should use the standard, sector specific rate. If they fall below, the higher rate of 16.5% needs to be applied.
We expect that a lot of service-based businesses will likely not meet the requirements and, therefore, be classed as limited cost traders. We anticipate that as the majority of their costs are likely to be service based, expenditure on qualifying goods, such as stationery as an example, are likely to be small.
This note gives a brief summary of the changes but like all things tax related it’s never straight forward! Please call us on 020 8686 7942 to discuss specific matters relating to your business and the use of the Flat Rate Scheme, or any other VAT issue.