It was announced in the Autumn Statement on 23 November that there would be changes to the VAT Flat Rate Scheme with effect from 1 April 2017.
The changes will affect those businesses considered as ‘limited cost traders’, being one 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 £1,000 p.a. if the prescribed accounting period is one year (proportioned accordingly if not one year)
The 2% calculation must only include goods used exclusively for the purpose of your business (i.e. with no private use element).
Spending on services does not count, and the rules also exclude expenditure on capital purchases, motor expenses and food and drink.
Further exclusions include goods for resale, leasing or hiring out if your main business activity does not ordinarily consist of selling, leasing, letting or hiring out such goods; goods that you intend to re-sell or hire out, unless selling or hiring is your main business activity.
If the business is considered a limited cost trader, a rate of 16.5% on VAT inclusive turnover is applicable.
The new rate does not come into effect until 1 April, therefore VAT periods that straddle this date will need to be split in two, with the second period commencing 1 April.
The test to determine whether the 16.5% rate applies should not be done for the period before 1 April 2017. The calculation for the second period should not include turnover or supplies from the first period.
More information on this can be found here.
In order to determine what rate applies, actual expenditure on goods for each VAT period after 1 April will need to be reviewed each time a VAT return is completed.
Therefore, there may be periods where the business applies the VAT Flat Rate for the business type and some where the limited cost trader rate applies.
Newly registered businesses within the first 12 months of VAT registration will still be able to claim the 1% discount, therefore a rate of 15.5% may apply.
HMRC have created a calculator to help determine the correct rate to apply to the VAT period, which is available here.
For more help on this please don’t hesitate to get in touch.
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