Flat Rate VAT Changes: A Guide

Important changes to Flat Rate VAT Scheme from April 1st 2017

The Government announced in its Autumn Statement 2016 its plans to reform the VAT Flat Rate Scheme from 1 April 2017. Now, following the end of a consultation by HMRC we are in a position to set out further what this may mean for you and your business.

As a reminder, the Flat Rate Scheme is a simplified method for eligible businesses to work out their VAT liability by applying a fixed percentage, based on the trade or profession to the VAT inclusive turnover. Under this method any VAT reclaimable is restricted (except on capital equipment greater £2000).

For example, if you are an IT contractor, your fixed percentage would typically be 14.5%. If you invoice a client for £2,500 plus VAT you will pay HMRC £435 (£3,000 x 14.5%). The standard rated method involves calculating the VAT liability based on VAT charged on sales less VAT incurred on purchases.

What’s changing with the flat rate VAT scheme?

Businesses using the Flat Rate Scheme must perform an additional test each quarter to confirm first if they meet the criteria as a limited cost trader. A limited cost trader is defined as one whose gross expenditure on relevant goods is either:

  • less than 2 % of their Vat inclusive turnover or
  • greater than 2% but less than £1000 per annum.

Goods do not include:

  • any services – which is anything that isn’t goods
  • expenses like travel and accommodation
  • food and drink eaten by yourself or your employee(s)
  • vehicle costs including fuel unless you are in the transport business using your own, or a leased vehicle
  • rent, internet, phone bills and accountancy fees
  • gifts, promotional items and donations
  • goods you will resell or hire out unless this is your main business activity
  • training and memberships
  • capital items for example office equipment, laptops, mobile phones and tablets

To check if you meet the criteria as a limited cost trader, HMRC’s flat rate VAT checker tool can help.

If you are deemed as a limited cost trader, instead of applying the fixed percentage based on your trade or profession, a new rate of 16.5% should be applied to VAT inclusive turnover to calculate your VAT liability. For a typical IT contractor currently on a fixed flat rate of 14.5%, this of course is an increase of 2%. Note, that if you are in the first year of the Flat Rate Scheme a further 1% discount will still be applied.

Transition to the new VAT flat rate

To ensure transition correctly to the new 16.5% rate where applicable from 1 April 2017, legislation was published on 23 November 2016 to prevent businesses from issuing invoices or receiving payments prior to 1 April 2017 for services provided post 1 April. Effectively, any such supply will be deemed to have taken place on 1 April 2017 and therefore subject (if applicable) to the new flat rate percentage of 16.5%.

Our advice

Traders that are using the Flat Rate Scheme and are still within the first 12 months of VAT registration will still be eligible for the 1% first year discount. This remains the most tax efficient and simplistic scheme to calculate your VAT liability.

If you have been a user of the Flat Rate Scheme, have been VAT registered for more than one year and will be deemed a limited cost trader, leaving the scheme and accounting for VAT under the standard calculation method can produce a relatively insignificant sum of between £78 – £355 per annum (based on turnover of between £60k – £90K per annum and reclaiming input VAT on accountancy fees alone). To reclaim input VAT on eligible purchases under this method you will be required to analyse and provide VAT receipts to support each purchase. This of course will require your additional time for potentially minimal benefit, dependent upon your level of expenditure eligible for reclaim.

If you require any further help or support when it comes to making the decision on what to do when it comes to VAT for your business, don’t hesitate to get in touch with us and we’ll be happy to advise you further. You can give us a call on 08000 149 597 or visit our request a call back page.

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