Changes to Flat Rate VAT Scheme April 2017

17th February 2017

Significant changes have been made to the current Flat Rate VAT Scheme, meaning the amount of VAT paid by many small businesses will alter from 1st April 2017. Going forward, all businesses classifying as a “Limited Cost Trader” will be unable to apply existing sector-specific flat rates, with these being replaced by a standard 16.5% across the board. With the date for the change looming, we break down the key changes and what they could mean for you and your businesses. flat rate vat

How does the current Flat Rate VAT Scheme work?

VAT is a tax paid on most goods and services. VAT-registered firms have to charge VAT on their sales and can reclaim VAT on their purchases. This involves careful record-keeping of all transactions and the rate of VAT they were charged at. Normally a business will work out its VAT due by deducting the VAT on its purchases from the VAT on its invoices and sales, giving a final VAT total payable.

However, the option of applying a Flat Rate Scheme is available to small traders with an annual turnover of less than £150,000.

Under the Flat Rate Scheme, this two-stage process is simplified into one step, with a flat rate of VAT applied on all sales within the business, with the rate of VAT varying dependent on the type of business trade and sector. For example, the Flat Rate applicable for Fairgrounds is 12.5% and for Delicatessens is 4%. (A full list of applicable Flat Rates can be found here).

To use an example, under the current Flat Rate Scheme, a qualifying delicatessen would pay 4% Flat Rate VAT, meaning that a £100 sale (including VAT) would generate a £4 VAT liability.

The VAT Flat Rate Scheme simplifies record keeping, makes it easy to work out VAT payable and can work out as the most efficient option for businesses that spend very little on goods and raw materials, such as service providers.

What are the changes to the Flat Rate VAT Scheme?

In the most recent Autumn Statement, it was announced that businesses with very low cost bases may not be able to utilise the Flat Rate VAT Scheme as it stands going forward, with this proposal confirmed at the end of February 2017. These businesses, who will be classified as “Limited Cost Traders” under the new scheme, will have to apply a standard 16.5% VAT rate to their sales when using the Flat Rate VAT Scheme.

So, in the instance of the delicatessen, should they classify as a “Limited Cost Trader” they would now pay £16.50 VAT on their £100 sale (16.5% Flat Rate applicable), instead of the previous £4 (4% Flat Rate applicable).

Why are these changes being introduced?

There have been reports that the current Scheme has been abused, particularly by those employment agencies supplying staff. So, in order to tackle this issue, the new measures are being introduced.

When are the changes happening?

The new rules are set to come into force on 1st April 2017, but may also affect invoices issued and goods bought in advance of this date. 

Who will classify as a “Limited Cost Trader”?

A “Limited Cost Trader” is defined as a business that spends less than 2% of its sales on goods (not services) in an accounting period. When calculating the amount spent on goods, the following purchases may not be included:

  • 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)

A firm will also classify as a “Limited Cost Trader” if it spends less than £1,000 a year, even if this is more than 2% of the firm’s turnover on goods.

With many small businesses relying on the current scheme, not only to simplify their administration but also to bring welcome tax reliefs, the news could be unfavourable for many. Labour-intensive businesses, where very little is spent on goods, such as IT contractors, consultants, hairdressers and accountancy and advertising firms will doubtless see increased VAT liabilities and business such as construction workers, where raw materials are provided by main contractors, may also be severely impacted.

How will this affect me and what do I have to do?

Any business currently utilising the Flat Rate VAT Scheme should carefully compare their trading activity under the current and proposed scheme to see how they may be affected. Although it is likely that there will still be benefits to applying the Flat Rate Scheme as opposed to the standard VAT Scheme, the figures should be carefully considered before taking any action. You may wish to consider setting aside additional funds in advance of the change to cope with any increase in VAT that you may need to pay.

If you would like to discuss these changes further, please do not hesitate to contact our experienced VAT Adviser, John Mutch.

John Mutch

Email:  john.mutch@ttrbarnes.com

Telephone: 0191 567 0304

All data correct as of time of distribution 17.2.17

 

 

 

Chartered Accountants in Sunderland, offering expertise on everything from Tax and Business Planning,
to Accounts and VAT.