Changes to the VAT Flat Rate Scheme
Changes to the VAT Flat Rate Scheme
As from 1st April 2017 a new flat rate percentage category has been created for businesses with limited expenditure. All businesses that fall within this category will be required to account for VAT using a 16.5% flat rate percentage against their gross turnover. The effect of this is that businesses will ultimately pay over almost all the VAT that has been charged to customers (19.8% of net).
According to HMRC a low cost trader is a business whose VAT inclusive expenditure on goods is:
- Less than 2% of their VAT inclusive turnover for the period; or
- Greater than 2% of turnover but less than £1,000 per annum
HMRC’s definition of ‘goods’ is an item purchased exclusively for business use and does not include:
- Capital expenditure
- Food & drink for the consumption of the business or its employees
- All costs associated with motor vehicles
- Services
If you currently use the VAT Flat Rate Scheme and are likely to now fall into the ‘Low Cost Trader’ category then you have a few options to consider:
- You could voluntarily de-register from VAT (if your VAT turnover is below the VAT de-registration limit)
- You could remain VAT registered but leave the Flat Rate scheme. Standard VAT accounting will allow you to recover input VAT on your expenditure however the increased administrative burden may need to be considered here.
- You could remain VAT registered and continue to use the VAT Flat Rate scheme applying the new percentage of 16.5% from 1st April 2017.
