Changes to the Flat Rate VAT scheme

Changes have been announced for the Flat Rate VAT scheme. This will affect businesses that spend very little on goods, including raw materials, such as firms providing services.

What is changing?

In the Autumn Statement, Chancellor Philip Hammond announced changes which affect businesses that have a very low cost base. These businesses are now called “limited cost traders”. A limited cost trader is defined as one whose VAT inclusive expenditure on goods for the business in an accounting period is less than 2% of VAT inclusive turnover, or £1,000 a year, whichever is greater.

Limited cost traders can still use the Flat Rate Scheme, but their percentage will be set at 16.5%. So if they sell a product for £120, including £20 of VAT, the flat rate amount is £19.80 (£120 x 16.5%). This is equivalent to 19.8% of the net total, meaning that there will be virtually no advantage to using the scheme for businesses in these fields.

When working out the amount spent on goods, it cannot include purchases of:

  • Capital goods (such as new equipment used in a business)
  • Food and drink (such as lunches for staff)
  • Vehicles or parts for vehicles (unless running a vehicle hiring business)

Who does it affect?

The emphasis on “goods” discriminates against businesses who incur VAT on services (rent, software licences, IT support, subcontractors, etc) and will increase the amount of VAT that must be paid. For example, this may affect IT contractors, consultants and hairdressers. It will also affect construction workers who supply their labour, but where the raw materials are provided by the main contractor.

When does this start?

The new rules start on 1 April 2017, but will also affect invoices issued and goods bought for use on or after 1 April 2017.

What do you need to do?

If your business is affected by these changes we recommend you undertake a VAT healthcheck as there are a number of options available. Please get in touch with a member of our tax team on 01903 234094.

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