Flat-Rate VAT Scheme Rules are Changing from 1st April

24 February 2017, 15:50

The flat-rate VAT scheme offered by HMRC has made paying VAT simpler for many small businesses. The idea is that the usual system of subtracting the VAT paid on purchases from the amount charged on sales is replaced by a one-step process, thus making life easier for many people who use the scheme. There are different flat rates for different businesses, and these can be found on the HMRC website.

From 1st April this year (2017), there will be a category for so-called limited-cost traders. This refers to people who spend only a small amount on goods for their business. This won’t apply to those who buy goods to sell to customers; instead, it will likely affect many who sell services.

Take someone who provides consultancy services, for example. They will have little need to buy goods to sell to others, since their ‘product’ will be the service they sell. The same applies to other people who sell services. If this includes you, make sure you find out more about the new rules by visiting the HMRC website to look at how the changes will take place.

The current flat-rate costs vary from one business to another. Once the new scheme comes into force, the standard flat-rate tax of 16.5% will be applied to all those who are viewed as limited-cost traders. Since the current rates for various businesses range from just 6.5% to 14.5%, everyone under the scheme will end up paying more in VAT than they do at present. However, you can see that some will face a hefty 10% hike, while others will face a 2% increase.

The definition of a limited-cost trader is someone who spends under 2% of their turnover on goods. This won’t include costs associated with food or drink supplied to workers, or for maintaining work vehicles. There is another catch, though, and this relates to those who have a low turnover. If a trader spends less than the £1,000 limit on goods, they will be viewed as a limited-costs trader even if the percentage works out to more than 2% of their turnover. So, bear this in mind if you think you might be affected.

For some, the best solution will be to move across to standard accounting for VAT, where the input and output taxes are calculated to arrive at the final bill. However, others will stick with the fixed-rate system and must simply swallow a greater VAT bill. The system has been in place for more than 10 years, but it seems the days of enjoying paying lower VAT rates are soon to disappear.

Now would be the best time to look at your figures to see if you will be affected, and if you must do anything to make sure your business complies.