As part of the Autumn Statement, the government announced that from the 1st April 2017, flat rate VAT will be changing to a uniformed level of 16.5% for businesses that fall into the category of ‘limited cost businesses’. The current rates vary depending on the trade sector of the business but can be anything from 4% to the standard rate of 14.5%.
The flat rate tax scheme was introduced to help small businesses save time by simplifying the accounting process for VAT, making it easier to work out the VAT that they have to pay.
In this blog, we will look at why this change was made, important timescales and how this change will affect you.
Why Has The Rate Of Flat Rate VAT Increased?
Unfortunately, the change has been made due to some larger companies reportedly taking advantage of the scheme to pay lower rates of tax. The Chancellor, Philip Hammond described this ‘aggressive abuse’ of the system following a spike in application to join the current flat rate VAT scheme.
The treasury hopes that this change will reduce the incentive for larger firms and agencies to take advantage of the system. Whilst assuring that smaller business will still benefit from the simplified accounting.
The Definition Of A ‘Limited Cost Trader’
From April 1st 2017, businesses that fall into the new category of ‘Limited Cost Trader’ will have to pay the new 16.5% flat rate VAT if they continue in, or become part of the flat rate tax VAT scheme, regardless of what sector the business is in.
According to HMRC, a limited cost trader is defined as a business that has an expenditure (inclusive of VAT) of either:
- Less than 2% of their turnover in a prescribed accounting period.
- Greater than 2% of their turnover but less than £1,000 PA if the prescribed accounting period is one year.
In addition to this, to prevent business owners adding their own purchases to increase their costs above the 2% threshold, the following items must be excluded:
- Capital goods
- Food and drink consumption by the business or its employees (for example staff lunches)
- Vehicles, vehicle parts and fuel (except where the business carries out transport services)
What Does This Change Mean For Businesses?
For small businesses who fall into the category of ‘Limited Cost Trader’, this change will mean an increase in the amount of tax paid to HMRC. It will likely have a greater impact on businesses who provide a service and very little is spent on goods – for example, hairdressers, driving instructors and construction workers who supply their labour but not the goods.
If you find your business in this position, you will have some options from April 2017:
- Stay on the flat rate VAT scheme and pay the 16.5% percentage going forward, this will increase your outgoing – but means no extra administrative work for you and your staff
- De-register from VAT – the deregistration threshold is currently £81,000 annually pre-VAT
- Switch to the standard VAT scheme, this allows you to offset VAT on costs against your VAT on your sales, this will require a little more administrative work or help from an accountant – but could be more profitable than operating as a ‘limited cost trader’ under the new flat rate VAT scheme
Need A Hand?
We understand this change may come as a shock to some small businesses who are now facing a hike in their VAT tax rates. At First Call, we’ve worked alongside small businesses & SME’s for years, if you find yourself affected by these changes – or are not sure what the best course of action for your business is, give us a call on 007 3790810 and speak to one of our specialist team.
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This post was written by Steph Roffey