Changes to the VAT Flat Rate scheme from April 2017 – following the Autumn Statement

New legislation is to be introduced from 1st April 2017 for Companies on the Flat Rate scheme which may mean the Flat Rate percentage will rise to 16.5%. This will impact “Limited Cost Traders”, i.e. companies with low cost base, such as contractors and freelancers.

The new rules will be:

A limited cost trader will be defined as 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 purpose of the business but exclude the following items:

  • capital expenditure
  • food or drink for consumption by the flat rate business or its employees
  • vehicles, vehicle parts and fuel (except where the business is one that carries out transport services – for example a taxi business – and uses its own or a leased vehicle to carry out those services)

These exclusions are part of the test to prevent traders buying either low value everyday items or one off purchases in order to inflate their costs beyond 2%.

So what is not included?

The 2% is for goods not services so the following will not be included:

  • Accountant’s fee’s
  • Software used for book-keeping, such a s cloud based book-keeping tool
  • Director’s salary

 

How will it be measured?

The 2% is for each accounting period;  i.e. each VAT quarter. This means you can’t simply go out and made a large purchase of goods once a year to get you over the limit.

Going forward:

For those that might fall under this, the possible options going forward are

  • If the contractor has high outlays for services then it may be beneficial to switch to the standard VAT accounting scheme and file a VAT return each quarter accounting for the VAT input tax in purchases.

 

  • Contractors who fail the limited cost trader test and whose turnover is below the VAT registration limit may want to just deregister for VAT to avoid the admin of standard VAT accounting for miniscule benefit.