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28th February 2017
HMRC have announced these changes to the VAT flat rate scheme in order to counter what they see as abuse of the scheme.
The flat rate scheme was brought in as a simplified way of dealing with VAT, however many businesses are able to make additional profit by being on the VAT flat rate scheme which HMRC are now looking to close out.
From April 2017 HMRC propose to introduce a new category of trader, a ‘limited cost trader’, with a VAT flat rate scheme percentage of 16.5%
Currently under the flat rate scheme a business chooses the appropriate flat rate percentage according to its sector, however under the new proposals you will have to consider whether you will meet the conditions for a ‘limited cost trader’ and if you do you will have to use the 16.5% flat rate percentage.
A business is a limited cost trader if its VAT inclusive expenditure on goods is:
The big unknown at the moment is exactly what will count when it comes to the definition of ‘goods’.
The current draft guidance says that goods are those used exclusively for business purposes, excluding:
What this leaves as a question is whether items that are traditionally seen as being services rather than goods can count towards the cost base of the business – for example will internet and telephone costs count as goods?
Many service based businesses do not spend much on goods but do have services expenses including subscriptions, telephone costs, software and accounting fees.
It would seem harsh if these do not count as business costs when it comes to the definition of a ‘limited cost trader’, but the current draft guidance is unclear.
If you are caught by the new rules and are deemed to be a ‘limited cost trader’ you will have some options from April 2017:
Either download and keep our VAT Flat Rate Scheme Changes 2017 PDF version or if you would like to talk to one of the team, then please do not hesitate to get in touch by filling in the form below:
have you read our previous post?