Important Changes to Flat Rate VAT Rules 1st April

From the 1st April 2017 changes are being made to the flat rate VAT scheme that could affect all businesses currently registered.

How Flat Rate VAT has worked until now…

Under the existing flat rate VAT scheme any business with sales of less than £150,000 can register for the scheme. When you register you select a flat rate of VAT which is based on the industry in which you work. You charge your customer 20% VAT but only pay HMRC the flat rate % of your total sales including VAT. Being part of the scheme means you cannot reclaim VAT on invoices you receive from suppliers (apart from some exceptions) but the scheme has offered cash flow advantages to many smaller businesses.

What are the changes…

From 1st April 2017 HMRC are introducing a 'limited cost trader' evaluation to assess the flat rate % you should pay each quarter. A business will be required to check its spend on goods (not services) in each quarter and if the spend on goods is less than 2% of the turnover (or less that £250 for small turnover business) in that quarter a flat rate of 16.5% must be applied instead of the usual industry determined rate. Not only that you will also be classed as a limited cost trader if you spend less than £1000 on goods in a year.

16.5% of total turnover is equivalent to paying 19.8% on a "normal" VAT basis, so very few businesses will see any cash advantage from doing this.

What are classed as goods…

Goods are things you buy in your business but HMRC have set out some specific exemptions that cannot be used to when calculating your percentage spent on goods. These exemptions are:

  • 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).

What should you do?

If you use the flat rate scheme it would be a very good idea to have a look at your percentage spend on goods over the last few quarters to see if it is more than 2% of your turnover.

If you find your rate of spend varies considerably you may want to consider reviewing how you purchases items (can you pay for goods over time to spread the cost), you may want to time annual purchases differently or even simply buy more! Your best options is to speak to your accountant and ask them to review this for you or come and have a chat with us! All of the information above is very generic, when working with clients we are assessing their specific business position and needs over the next year to see if we can plan purchases a little more effectively. Ensure you get advice that considers your personal business position.