Changes to UK VAT Flat Rate Scheme

The Chancellor announced a shock change to the way the VAT Flat Rate Scheme works in his Autumn Statement of 2016. These changes are due to come in to effect from 1 April 2017 and for many businesses using this scheme it will become uneconomic to continue.

The Flat Rate Scheme is a simplification measure for small traders with an annual turnover of less than £150,000. Users issue VAT invoices to business customers as normal, but only account for VAT at a flat rate percentage of turnover. The rate is calculated depending on the business sector but is normally significantly less than the 20% standard rate of VAT. The percentage includes an allowance for input tax. There have been recent reports that the scheme is being abused by employment businesses supplying staff.

In order to tackle this perceived abuse, legislation is being introduced so that, with effect from 1 April 2017, any business using the scheme, or wanting to use it, will have to decide if it is a limited cost trader. A limited cost trader is one whose VAT inclusive expenditure on goods for the business in a prescribed accounting period is less than 2% of VAT inclusive turnover, or is more than 2% but less than £1,000 a year. Limited cost traders will have to use a flat rate percentage of 16.5% irrespective of the type of business. Certain low value everyday purchases are excluded from the definition of goods, as is capital expenditure. Expenditure on services is not mentioned.

Anti-forestalling legislation has also been introduced to ensure that any limited cost trader using the scheme cannot use a flat rate of less than 16.5% beyond 1 April 2017. This higher flat rate percentage will impact on the savings the scheme can deliver to users with lower VATable costs.

An online tool will be available to help scheme users decide if they need to use the new rate from April.

We will be contacting potentially affected clients during February to assess the best approach to this change.

If you would like any further information please contact Gerry – [email protected]