The VAT flat rate scheme was put in place to simplify VAT reporting for small businesses and in some cases a significant VAT advantage can be obtained.
In his Autumn statement, The Chancellor Philip Hammond announced changes to the flat rate scheme which would curtail such advantages. The changes will affect businesses with a low cost base now called ‘limited cost traders’. Limited Cost Traders are still able to use the flat rate scheme but their percentage will be 16.5% with effect from 1 April 2017.
A limited cost trader will be defined as one whose VAT inclusive expenditure on goods, used exclusively for the purpose of the business, (excluding capital expenditure, subsistence and vehicle expenditure) 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 accounting period is one year (if it is not one year, the figure is the relevant proportion of £1,000)
The changes will therefore affect those with only a small spend on goods, such as service related businesses including construction workers, hairdressers, computer and IT consultancy, estate agent and property management, and management consultancy.
Please contact us for further clarification on these important VAT changes