Small business users of the VAT Flat Rate Scheme may see the rate they pay increase under new changes being introduced from 01 April 2017.
The Flat Rate Scheme was created to simplify businesses’ record keeping, by making it easier for smaller companies to calculate their Vat Liability.
VAT is usually calculated via accounting for output vat on sales and input vat of purchases. In comparison, the Flat Rate Scheme uses a simplified single step process and this can sometimes bring about some businesses effectively paying less or more than they would do under the ‘typical’ two stage VAT regime.
HM Revenue & Customs has been aware of this inconsistency for some time.
With this in mind, the government announced changes to the Scheme in the Autumn Statement 2016, which will see the rate of low cost businesses, referred to as ‘limited cost traders’, increase.
They can still use the Flat Rate Scheme, but their percentage will increase to 16.5 per cent. So if they sell £200 of work, plus £40 of VAT, the flat rate amount payable is £39.60 or £240 x 16.5 per cent.
Who exactly will this apply to?
A definition has been created of ‘limited cost traders’ who count as ‘labour-only’ businesses that will have to use the 16.5% rate if they want to use the Flat Rate scheme.
A limited cost trader is defined as one that spends less than 2% of its sales on goods (not services) in an accounting period.
When working out the amount spent on goods, it cannot include purchases of:
- 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 a firm spends less than £1,000 in their accounting period they also count as ‘labour-only’ even if this is more than than the 2%. If your accounting period is longer / shorter than 12 months, the £1,000 threshold is pro-rated.
If you would like to discuss your situation please call the office 01527 68235
