Big Changes to the VAT Flate Scheme – April 2017

Big Changes to the VAT Flate Scheme – April 2017

What is it?

The VAT Flat Rate Scheme has been popular with small businesses since 2002, enabling them to pay VAT at a considerably lower percentage of turnover rather than paying VAT on the difference between sales and purchases. It was a chosen scheme by many businesses as it helped to simplify accounting for VAT and in the majority of cases it generated VAT savings each year.

What’s changing?

All good things must come to an end of as of 1 April 2017 HMRC are implementing changes to prevent what they believe is abuse of the scheme and a new 16.5% flat rate is being introduced for businesses with limited costs to be known as a “limited cost trader”.

What’s a limited cost trader?

A limited cost trader is one whose VAT inclusive expenditure on goods is either:

  • Less than 2% of their VAT inclusive turnover in a prescribed accounting period
  • 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).

Goods, for the purposes of this measure, must be used exclusively for the business so you cannot include anything partly used for private purpose. Other exclusions include:

  • Capital expenditure (office equipment, laptops etc)
  • Any services (rent, internet, phone bills and accountancy fees)
  • Food or drink for consumption by the flat rate business or its employees
  • Gifts, promotional items and donations
  • Goods you will resell or hire out unless this is your main business activity
  • Vehicles, vehicle parts and fuel (except where the business is one that carries out transport services)

These exclusions have been included in the new rules to prevent businesses buying either low value everyday items or one off purchases to inflate their costs beyond the 2% and avoid the increased rate.

Who will it effect?

The new change will increase the VAT bill of businesses that are labour based and which spend little on goods. Examples of the kind of businesses that may be affected are IT contractors, consultants and construction workers who supply their labour but are not responsible for purchasing the raw materials.

What do I need to do?

As business owners, it is your responsibility to ensure the correct flat rate scheme percentage is used on each and every VAT return. HMRC have published a tool to find out whether you meet the “limited cost trader” criteria:

If you meet the definition of a limited cost trader and staying on the flat rate scheme means an increase in your VAT bill, you may wish to consider moving to the standard VAT scheme. It’s straight forward to do, ask your accountant for further details. Alternatively, if viable for your business, another option would be to consider de-registering for VAT. Seek advice from your accountant and whether it is beneficial for you to do so.

Can I still claim my first year discount?

If you are still within the first 12 months of VAT registration, you will still be eligible for the 1% first year discount. This would mean that you are still on the most tax efficient and simplistic scheme to calculate your VAT liability.

Need help?

For further advice on how the changes may affect your business, please contact us on 01386 366741. Alternatively, you can find further information on HMRC’s website: