Changes to the VAT Flat Rate Scheme

Philip Hammond delivered what as some are seeing as another blow to contractors and consultants in the form of changes to the VAT Flat Rate Scheme.

In his first (and last!) Autumn Statement speech he announced that from 1st April 2017, a new 16.5% VAT flat rate will be introduced for businesses who have limited costs. These businesses have been termed a ‘limited cost trader’.

Are the changes necessary

Well, HMRC obviously think so. They state on their website that the changes are being introduced in order to tackle “aggressive abuse of the VAT Flat Rate Scheme”. These are very hard hitting words.

HMRC believe that some businesses are abusing the VAT Flat Rate Scheme and believe that the change will help to reign in this abuse.

How will the new 16.5% work?

The Flat Rate Scheme was introduced to simplify the process that businesses use to calculate the amount of VAT that they have to pay to HMRC. Our article Choosing the right VAT route explains in great detail how the Flat Rate Scheme works. It is worth having a read of it, if you are unfamiliar with the Flat Rate Scheme.

Businesses will now be required to determine if they are a ‘limited cost trader’ by completing a simple test. If their business, matches the criteria set out for a ‘limited cost trader’ they will have to use the 16.5%, instead of what they previously used as outlined in HMRC’s trade sector list.

What is a limited cost trader?

A limited cost trader is defined as one that spends less than 2% of its sales on goods (not services) in an accounting period.

When working out the amount spent on goods, it cannot include purchases of:

  • capital goods (such as new equipment used in a business)
  • food and drink (such as lunches for staff)
  • vehicles or parts for vehicles (unless running a vehicle hiring business)

A firm will also be a limited cost trader if it spends less than £1,000 a year, even if this is more than 2% of the firm’s turnover on goods.

This definition covers businesses that are labour intensive and includes contractors and consultants.

Don’t delay, start preparing today

The new rules come into force on 1st April 2017, but may affect invoices issued and goods bought, from now on. Further details are available in section 8.2 and 9.7 of the HMRC’s updated Flat Rate Scheme leaflet.

Further details of this change will be made available on 5th December when the draft secondary legislation will be published.

Even though these changes may reduce some of the benefits that the Flat Rate Scheme gives, we believe it will still be more cost effective for certain contractors and consultants to be on the scheme than not.

If you have any questions about how the changes will affect you, give our team a call on 020 8952 2234, who will be delighted to answer any of your questions.