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VAT flat rate scheme changes ahead

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April 2017 sees changes to the VAT flat rate scheme, which may have a detrimental impact on certain small businesses. Here we explore the new rules.

What is the flat rate scheme?

The VAT flat rate scheme is designed to reduce the administrative burden for small businesses by simplifying the way in which they calculate their VAT liability. It is available to VAT-registered businesses which expect their VAT taxable turnover in the next 12 months to be £150,000 (excluding VAT) or less.

The scheme saves time by removing the need to calculate and record output tax and input tax when calculating the net VAT due to HMRC. Instead, a flat rate percentage is applied to the turnover of the business as a one-off calculation. The set percentage used depends on which sector the business operates in.

A business must leave the scheme if its turnover for the previous 12 months was more than £230,000 (including VAT), or the business expects turnover to exceed this limit in the next 12 months. A business must also leave the scheme if there are reasonable grounds to believe that total income is likely to exceed £230,000 in the next 30 days.

Forthcoming changes

In the 2016 Autumn Statement, the Chancellor announced that a new 16.5% rate will be introduced for businesses with limited costs, such as many labour-only businesses. The new rate comes into effect from 1 April 2017, although anti-forestalling provisions are already in force (see later).

A 'limited cost trader' is defined as one that spends less than 2% of its VAT inclusive turnover on goods in an accounting period. A firm will also be defined as a limited cost trader if its expenditure on goods is greater than 2% of its VAT inclusive turnover but less than £1,000 a year. In practice, this might apply to labour-intensive businesses such as hairdressers, IT contractors and consultants.

The rules state that goods must be used exclusively for the purpose of the business. When calculating goods expenditure, purchases on the following are excluded: capital expenditure; food or drink for consumption by the flat rate business or its employees; and vehicles, vehicle parts and fuel (except where the business carries out transport services and uses its own or a leased vehicle).

Anti-forestalling provisions

The government has issued anti-forestalling provisions which are designed to prevent any business defined as a limited cost trader from continuing to use a lower flat rate beyond 1 April 2017. These provisions will affect a business that supplies a service on or after 1 April 2017 but either issues an invoice or receives a payment for that supply before 1 April 2017.

We can help you to decide whether the flat rate scheme is right for your business.