The VAT flat rate scheme

In the Autumn Statement on 23 November 2016 a surprise announcement was made about the VAT flat rate scheme with the introduction from 1 April 2017 of a new flat rate of 16.5% for those businesses with very low costs. The new rate has been introduced to target micro-businesses who were using the flat rate scheme for financial gain rather than to genuinely save on administration time, but it unfortunately also catches out businesses that are legitimately using the scheme.  Businesses either currently using the flat rate VAT scheme or thinking of doing so in the future will therefore need to consider whether the new 16.5% rate will apply to them and what the implications of this would be. The 16.5% flat rate percentage applies if a business meets the definition of a newly created term called a ‘limited cost trader’. A limited cost trader is a business whose VAT-inclusive expenditure on goods is either:

• less than 2% of their VAT inclusive turnover in a prescribed accounting period
• greater than 2% of their VAT inclusive turnover but less than £250 per quarter (£1,000 per annum)

HMRC’s definition of ‘goods’ for this purpose is stringent and any such goods must be used exclusively for the business but does not include the following types of expenditure:

• capital expenditure, e.g., computers, office furniture, plant & machinery, etc
• food or drink for consumption by the flat rate business or its employees
• vehicles, vehicle parts and fuel (except for a business that provides transport services, e.g., a taxi business)
• goods for the purpose of resale unless the main activity of the business is the sale of those goods
• goods for disposal as promotional items, gifts or donations

HMRC have developed an online calculator for businesses to calculate if they need to pay the higher 16.5% flat rate and work out which goods count as costs.  The tool can be accessed here.