Changes to the VAT Flat Rate Scheme come into effect from 1 April 2017


This blog will be of particular interest to businesses who currently use the VAT Flat Rate Scheme, and especially for those employment businesses supplying staff (i.e. management consultants).

What is the VAT Flat Rate Scheme?
There are several different ways to account to HMRC for VAT, including;

Annual Accounting Scheme

Cash Accounting Scheme

Flat Rate Scheme

The Flat Rate Scheme simplifies the process of paying VAT and is aimed at small traders with an annual turnover of less than £150,000. Businesses issue invoices to their customers charging 20% VAT as normal, but only submit payments of VAT at a flat rate percentage of turnover back to HMRC on their VAT Returns.

The rate you use is calculated depending on the business sector your business sits within, but is normally significantly less than the 20% standard rate of VAT you charge customers. The idea being, the flat rate you pay covers the input VAT you would normally recover on your costs. This makes the VAT Flat Rate Scheme very appealing to business owners who normally have very little in the way of input vat to recover.

Are you a limited cost trader?
HMRC have recently decided to crack down on abuse to the scheme and legislation will now be introduced so that, with effect from 1 April 2017, any business using the scheme, or wanting to use it, will have to decide if it is a limited cost trader.

A limited cost trader is one whose VAT inclusive expenditure on goods for the business* is less than 2% of turnover (incl. VAT), or is more than 2% but less than £1000, during their accounting year.

How will limited cost traders be effected?
From 1 April 2017 limited cost traders will have to use a flat rate percentage of 16.5% when paying VAT to HMRC, irrespective of the type of business.

On top of this anti-forestalling legislation has also been introduced to ensure any limited cost trader using the VAT Flat Rate Scheme cannot use a flat rate of less than 16.5% after 1 April 2017. It goes without saying that this higher flat rate percentage will impact on savings the scheme can deliver to businesses with lower VATable costs.

websters – good solid accounting advice
Although this will cause a blow to some businesses there are still savings to be made for those currently using, or wishing to register for, the VAT Flat Rate Scheme. If you are wondering if this scheme is a good option for your business you can find out more about it here and look at the VAT % by business sector. But, please note you are responsible in calculating whether you fall in to the category of a limited cost trader and ensuring you pay the correct flat rate percentage going forward. If you don’t and your business is selected for an inspection you will be penalised and a payment of back tax will be demanded.

If you are not sure about if this scheme is right for your business and would like to discuss it, or any other matter with one of our accounting experts – you can contact us on 01223 507080 or pop down to one of our upcoming seminars:

FREE Individual and Business Tax “pop in” Surgeries with qualified accountant Gary Eves

Starting in Business Seminars hosted by experts and for those in their first year of business
*Certain low value everyday purchases are excluded from the definition of goods as is capital expenditure. Expenditure on Services is not mentioned.

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