2016 Autumn Statement: Changes to the VAT Flat Rate Scheme

Last week saw Chancellor Phillip Hammond present his first Autumn Statement outlining his priorities for spending, taxation and the UK economy.

Last week saw Chancellor Phillip Hammond present his first Autumn Statement outlining his priorities for spending, taxation and the UK economy.

A significant change, which was briefly touched upon, could have important implications for businesses using the VAT Flat Rate Scheme.

The change will have a significant impact on those businesses that are identified by HMRC as having ‘limited costs’ such as businesses providing services.

Historically, the VAT Flat Rate Scheme has simplified a business’ record keeping by providing a fixed flat rate for different types of businesses with a turnover of £150,000 or less, making it easier to work out the VAT they have to pay.

The additional benefit for some businesses is that the amount of VAT they need to pay to HMRC when using this method has been lower than what would be payable if using the standard basis of preparing their VAT returns.

In the Autumn Statement, the Chancellor announced that from April 2017 businesses who supply services rather than goods will need to check the level of costs they incur and if they fall below a certain level they will become ‘Limited Cost Traders’.

The flat rate for a Limited Cost Trader will be fixed at 16.5%, which may make the scheme no longer beneficial for many types of businesses.

A business will become a Limited Cost Trader if it spends less than 2% of its sales on goods, or if it spends less than £1,000 a year on goods even if this is more than 2% of its turnover.

The definition of goods excludes capital expenditure, food and drink for consumption or vehicles, vehicles parts or fuel except for businesses supplying transport services.

Draft legislation will be published on 5 December that will provide further details of the announced changes, but any affected businesses will need to look at whether the Flat Rate Scheme will still be appropriate and beneficial after April 2017.

If you currently use the Flat Rate Scheme or wish to discuss the changes in more detail and how they may affect your business, please email Kevin Winterburn: kevinw@sheards.co.uk

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