Changes to Flat Rate VAT
Posted on 21st March 2017 at 10:43
As you are all aware that at the Autumn statement on 23rd November 2016 the Chancellor of the Exchequer had announced the introduction of a new 16.5% VAT flat rate for business with limited costs. This will take effect from 1st April, 2017.
The flat rate scheme [FRS] is a simplified accounting scheme for small businesses. Currently businesses determine which flat rate percentage to use by reference to their sector, but as from 01/04/2017 businesses must also determine they meet the definition of a limited cost trader which has now been introduced in new legislation.
What is a limited cost trader?
In the Autumn Statement, Chancellor Philip Hammond announced changes which affect businesses which have a very low-cost base. These businesses are now called "limited cost traders".
Limited cost traders can still use the Flat Rate Scheme, but their percentage will be 16.5%. So, if they sell £120 of work, including £20 of VAT, the flat rate amount is £19.80 (£120 x 16.5%).
A limited cost trader is defined as one that spends less than 2% of its sales on goods (not services) in an accounting period. It will increase the VAT paid by labor-intensive businesses where very little is spent on goods. For example, this may affect IT contractors, consultants’ firms etc.
The yardstick for leaving the [FRS] is surprisingly simple:
Do you spend more than 1% of your turnover on VAT-able goods and services?
If “yes” it’s likely, you’ll be better of moving to the standard Cash base VAT scheme.
If you have any questions, please feel free to contact us.
Tagged as: VAT Flat Rate
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