Proposed Changes to VAT Flat Rate Scheme

Proposed Changes to VAT Flat Rate Scheme

Currently under the flat rate scheme a business chooses the appropriate flat rate percentage according to its’ sector. From 1 April 2017, businesses using the Flat Rate Scheme or joining the scheme will need to decide whether they are a “limited cost trader”. Businesses that meet the definition of a limited cost trader must use the new 16.5% rate under the Flat Rate Scheme.

VAT Changes

What is a limited cost trader?

A business is a limited cost trader if its VAT inclusive expenditure on goods is:

  • 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 £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)

HMRC has yet to define what is ‘goods’ in this respect. The current draft guidance says that goods are those used exclusively for business purposes, excluding

  • Capital expenditure
  • Food & 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)

So, expenditure on services such telephone and internet, would this count as goods? Service based businesses tend not to spend much on goods but do have services expenses including subscriptions, telephone costs, software and accounting fees.

It would seem harsh if these do not count as business costs when it comes to the definition of a ‘limited cost trader’, but the current draft guidance is unclear.

So how will this affect you?

If you do not have many business expenses, then you should consider the potential impact of being classified as a limited cost trader.

Included below is an example of how the change might affect John, an IT consultant who has a turnover of £120k but minimal business expenses:

VAT John Charges his customer:                         

Net Sales £120,000
VAT on Sales at 20%   £24,000
Total Gross Sales £144,000
John Pays HMRC under Flat Rate Scheme   £20,880
Flat Rate Gain     £3,120

Under the proposed new flat rate scheme from 1st April 2017 for Limited Cost Trader at 16.5%

Net Sales £120,000
VAT on Sales at 20%   £24,000
Total Gross Sales £144,000
John Pays HMRC under Flat Rate Scheme   £23,760
Flat Rate Gain        £240

As per our illustration above, the introduction of 16.50% VAT flat rate for limited cost traders will almost nullified the entire VAT FRS gain received by John before 1 April 2017.

Therefore, John could be more beneficial to deregister from FRS and be better off by claiming input VAT under the standard VAT scheme.

If you are not our client but would like to know more about the new flat rate, please contact on: Tim on 07920 141762 or tim@ms-limited.com

Disclaimer: The above information is based on the announced Autumn Statement 2016 and subject to further amendment.

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