Flat Rate VAT – Changes from 1st April 2017

21st March 2017 Nicky Cole
Flat Rate VAT  – Changes from 1st April 2017

As it stands the Flat Rate VAT percentage is determined by the principal activity of the business, i.e. the part of the business that generates the most turnover.

However, HMRC say that some businesses are taking advantage of the current system and therefore, from the 1st April 2017 they will be introducing a new Flat Rate of 16.5%, for businesses that are deemed ‘Limited Cost’, defined as a business whose VAT inclusive expenditure on relevant goods is either:

  • Less than 2% of their VAT inclusive turnover, in a prescribed accounting period
  • Or greater than 2% of their VAT inclusive but less than £1000 per annum, if the prescribed accounting period is one year. (If it’s not one year, the figure is then the relevant proportion of £1000.)

Relevant Goods include:

  • Office supplies
  • Utilities
  • Stock for resale (only relating to the principal activity)
  • Cleaning products
  • Software on disk

For example; A Hairdresser could include hair products and a Taxi Driver could include fuel.

Other costs which are deemed ‘not relevant’ are:

  • Vehicle costs
  • Food or drink
  • Leased items
  • Gifts
  • Services
  • Telephone
  • Online/downloadable Software

In most cases, where there is low input (purchase) tax under the normal VAT rules, the advice is to come out of Flat Rate and revert to standard VAT.

To come out of the Flat Rate scheme, a letter must be sent giving the date of change to:

HMRC, Imperial House, 77 Victoria Street, Grimsby DN31 1DB

If a business is to stay in the Flat Rate scheme, their accounts will need to be analysed each quarter, to determine if they fall within the limited trader rules.

In some cases, a business will file at the Flat Rate percentage one quarter and the next at the 16.5% limited cost rate.

To cut down on admin, it was suggested that small businesses may like to consider the annual VAT scheme, so that the whole year can be assessed in one go.

More details can be found here:

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

 

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