Insights

HMRC have recently announced a change to the VAT flat rate scheme to counter what they see as abuse to the scheme.

With effect from 1 April 2017, a new 16.5% flat rate is being introduced for businesses with limited costs to be known as a limited cost trader.

Whilst full details of the changes have not yet been announced, for those of you on the flat rate scheme you need to establish whether you will be caught by these changes and the potential impact.

When the flat rate scheme was introduced, it was sold to us as being a simplified way of dealing with VAT; to some degree obliterating the intricacies of VAT recovery.

However, HMRC made no bones about the fact that it may also reduce your VAT bill. Indeed, there used to be a calculator on the HMRC website inviting businesses to work out their VAT flat rate savings to encourage the take up of the scheme.

So, what a U-turn this is given the reason for these changes is to seek to prevent businesses making additional profit by being on the VAT flat rate scheme.

So, what are these changes?

Basically, a new flat rate scheme of 16.5% is being introduced for limited cost traders i.e. 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 business so you cannot include anything partly used for private purpose. HMRC give the example of printer ink and stationery that you use for your office and home.

There are other exclusions too as follows:

• 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);

• Goods acquired with the intention of giving them away or donating them to a third party.

These exclusions have been included in the new rules to prevent businesses buying either low value everyday items or one off purchases to inflate their costs beyond the 2% and avoid the increased rate.

As business owners, it is your responsibility to ensure the correct flat rate scheme percentage is used on each and every VAT return. HMRC have said it will support businesses in checking their on-going and perhaps ever-changing status as limited cost traders by introducing an online tool.

If you would like help with your VAT please contact Simon Paterson at RJP by emailing sp@rjp.co.uk