VAT Flat Rate Scheme Changes

Changes to the VAT Flat Rate Scheme announced in November’s Autumn Statement will take affect from 1 April 2017, in order to tackle ‘aggressive abuse’ of the scheme.

What is the VAT Flat Rate Scheme?

The VAT Flat Rate Scheme makes it easier for businesses to calculate the amount of VAT they must pay.

Normally, a business calculates VAT by deducting the VAT on their expenses from the VAT of their sales. However, the Flat Rate Scheme simplifies this to one process.

Although the Flat Rate Scheme is a simpler, it is an approximation as it uses a flat rate percentage across all businesses to estimate the tax owed. As HMRC believe this system is being abused so businesses can pay less VAT, they have announced changes to make the system fairer.

What are the changes?

A new 16.5% flat rate scheme will be introduced for businesses with ‘limited costs’ i.e. businesses who spend little on goods.

The policy paper defined the affected businesses as ‘many labour only businesses’, which could suggest service-related businesses such as journalists, architects or engineers will not be included, although this is yet to be clarified by HMRC.

Between now and 1 April, anyone on the flat rate scheme or looking to join, needs to decide if they’re a ‘limited cost’ business and therefore under the new rate.

A ‘limited cost’ business is defined as a business 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 £1,000 per annum if the prescribed accounting period is one year (if it is not one year, the figure is the relevant proportion of £1,000)

Goods, for the purposes of this measure, must be used exclusively for the purpose of the business but exclude the following items:

  • capital expenditure goods
  • food or drink for consumption by the flat rate business or its employees;
  • vehicles, vehicle parts and fuel

Will your business be affected by the changes to the VAT flat rate scheme? Leave your concerns in the comment section below.


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