Major changes to the VAT flat rate scheme from 1 April 2017

Major changes to the VAT flat rate scheme from 1 April 2017

As announced in the 2016 Autumn Statement, major changes to the VAT flat rate scheme will come into effect from 1 April 2017. The changes may have a significant and undesirable impact on the amount of VAT that small businesses using the scheme have to pay.

At the moment, businesses who use the scheme take advantage of the simplified method of computing the VAT liability thus saving much needed time. The businesses account for VAT on gross turnover and do not claim VAT on most of their costs. The revision to the scheme will change this, specifically for businesses that make little or no purchases of goods or what HMRC term “limited cost traders”. A limited cost trader is defined by HMRC as one that spends less than 2% of their VAT inclusive turnover in a prescribed accounting period or greater than 2% of their VAT inclusive turnover, but less than £1,000 per annum, on purchasing goods.

Not only will this result in an additional administrative burden as flat rate scheme users will now have to monitor their level of purchases on an ongoing basis, but also the flat rate applicable to limited cost traders will increase to 16.5%.

Take for example a training consultant who bills his clients £100,000 per year, £120,000 inclusive of £20,000 VAT. Using the flat rate scheme he currently pays 12% to HMRC = £14,400 VAT, leaving him with the £5,600 VAT difference between VAT charged to his clients and VAT paid to HMRC.  If the VAT inclusive cost of his goods for the year is less than £2,400 (2%) excluding capital expenditure, food, fuel, vehicle costs then he would have to pay flat rate VAT at 16.5%, £19,800 to HMRC! It would almost certainly be beneficial for him to stop using the flat rate scheme and recover VAT on his business costs.

If you are currently using the VAT flat rate scheme please contact us on the details below to discuss whether the changes will apply to you.

Steve Crompton
Partner – Head of Tax
direct dial: 01942 292541
mobile: 07790 840394

Chris Barrington
Tax Partner
direct dial: 01942 292505
mobile: 07730 436070