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
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.