A new category for the flat rate scheme will apply to limited cost traders from 1 April 2017.
The flat rate VAT scheme is designed to simplify VAT compliance for smaller businesses, however it can offer a financial advantage where a business has a relatively low cost-to-turnover ratio and HM Revenue and Customs have long suspected that it is open to abuse.
To counteract this, in the Autumn Statement on 23 November 2016, the Chancellor announced the introduction of a new 16.5% VAT flat rate for businesses with limited costs.
It is expected that out of an estimated 411,000 existing users of the flat rate scheme, around 123,000 will be affected by these changes.
A limited cost trader is defined as one whose VAT inclusive expenditure on goods is the lower of 2% of their VAT inclusive turnover or £250 per quarter.
Goods for this purpose must be used exclusively for business. Capital expenditure, and in most circumstances fuel, food and drink are excluded from the calculation.
The position will also need to be reviewed each time a scheme user prepares a VAT return – so quarterly in most cases – which will increase the compliance burden for a scheme that is purportedly meant to simplify matters.
The introduction of the limited cost trader category will mean that those caught by the new rules will have to account for output VAT of 16.5% on their gross business income – currently, the highest rate within the scheme is 14.5%, so this could result in a significant increase in VAT costs.
The loss of tax savings means that low-cost businesses such as those in the professional service sector should review their position to minimise their exposure to VAT costs.
In some cases, this may be a matter of leaving the flat rate scheme and switching to traditional VAT accounting, or considering the business strategy for spending on goods to ensure that they avoid becoming a limited cost trader.
Contact Alastair Byrne at JWPCreers for further advice on 01904 717260 or email firstname.lastname@example.org