1st December 2016

New Flat Rate VAT rules

What you need to know

From 1st April 2017 new rules regarding Flat Rate VAT will be applied that may affect your business.

The Flat Rate Scheme was introduced to simplify business record keeping and make the calculation of VAT payable to HMRC much easier and, as a result, many small businesses under the income threshold of £150,000 adopted the scheme.

Whilst the principle was to simplify record keeping the VAT payable to HMRC was intended to be broadly the same as the amount payable if not using the scheme.

However, in their calculations HMRC hadn't considered the potential benefit, or as they refer to it “abuse of the scheme”, for what they call “Limited Cost Traders”.

A limited cost trader is defined a business that spends less than 2% of its turnover on goods (not services) in an accounting period. Of course it's not as straightforward as that as costs cannot include:

  • capital goods (such as new equipment used in a business);
  • food and drink (such as lunches for staff);
  • vehicles or parts for vehicles (unless running a vehicle hiring business);
  • if total spend is less than £1,000 a year even if this is more than 2% of turnover on goods.

If you are a limited cost trader a higher flat rate percentage of 16.5% must be applied from 1st April. If you are unsure whether this change applies to you please seek advice from your professional adviser.



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