The VAT flat rate scheme was introduced by HMRC to ease the process of filing quarterly VAT returns. Traders select the relevant percentage from a given list for their business, then apply this to total receipts, instead of having to calculate the amount to reclaim on expenditure.
From April 2017 there will be a change for those businesses who don’t spend much on “relevant goods” (below). These will be known as “limited cost traders”
Relevant goods are goods used or to be used by a flat-rate trader exclusively for the purposes of the business but excluding the following:
- vehicles, vehicle parts and fuel *
- any food or beverages for consumption by the trader or employees of the trader;
- capital expenditure goods
A “limited-cost trader” is a flat-rate trader whose expenditure on relevant goods in an accounting period, together with any VAT chargeable on that expenditure, is less than the “specified amount” (below).
The specified amount is the higher of:
- 2 per cent of turnover in an accounting period; and
- where the accounting period is one year, £1,000, and, in any other case, a proportion of £1,000 depending on the length of the period.
A limited cost trader will have to use a set percentage of 16.5% instead of the percentage relevant to their business.
From April 2017 it may be beneficial to revert to standard VAT accounting. We will review this with you when your VAT return is due for submission.
The following is an example of how this may affect your business, based on £1,000 of turnover:
| Old rates | New rate | |||||
| 10.5% | 12.5% | 14.5% | 16.5% | |||
| Net invoice value | £1,000 | £1,000 | £1,000 | £1,000 | ||
| VAT charged to customer | £200 | £200 | £200 | £200 | ||
| Gross invoice value | £1,200 | £1,200 | £1,200 | £1,200 | ||
| Payable to HMRC using flat rate percentage | £126 | £150 | £174 | £198 | ||
| Difference between incoming and outgoing VAT | £74 | £50 | £26 | £2 | ||
*(except where the business is “Transport or storage, including couriers, freight, removals and taxis” and the flat-rate trader owns a vehicle for business use or holds a vehicle for business use under a lease);
If you would like to understand more about these changes and how they affect you, then call one of the team today…
