Changes to the VAT Flat Rate Scheme April 2017

From 1 April 2017, the government will introduce a new flat rate category of 16.5% for businesses with limited costs.

The government believe that the Flat Rate VAT scheme has been abused in certain sectors where a limited company is used solely for accessing the Flat Rate VAT benefit, for a worker who is caught by IR35. However, genuine contractors across all market sectors will be impacted by the changes.

Who will the change affect?

The new Flat Rate percentage will apply to “limited cost traders”. HMRC guidance defines a business as a “limited cost trader” as one whose VAT inclusive expenditure on goods is either:

• Less than 2% of their VAT inclusive turnover in a prescribed accounting period
• Greater than 2% of their VAT inclusive turnover but less than £1,000 per annum if the prescribed period is one year (if not the £1,000 is pro –rated)

The meaning of goods is not defined in the legislation and therefore takes its everyday meaning and generally covers tangible items.

The legislation specifically excludes the following from the definition of “goods”:

• Capital expenditure on equipment
• Food and drink
• Vehicles, vehicles parts and fuel

It is likely that several contractors and freelancers will be affected as many of you have minimal vatable expenses, certainly in relation to the purchase of goods.

What you can do now?

Nothing changes until 1 April 2017 so there is time to plan. You will have some choices:

• Remain on the flat rate if you fall outside of the definition of a “limited cost trader”
• De-register from VAT if you fall below the compulsory registration threshold of £83,000
• Leave the flat rate scheme and account for VAT on the standard scheme, allowing you to claim back input VAT

Further information regarding the proposed changes can be found on HMRC’s website below:

https://www.gov.uk/government/publications/tackling-aggressive-abuse-of-the-vat-flat-rate-scheme-technical-note/tackling-aggressive-abuse-of-the-vat-flat-rate-scheme-technical-note