By Lynne Gowers on 3rd March 2017

Flat rate VAT changes explained

From 1st April 2017, the government is introducing a new 16.5% Flat Rate VAT scheme that will affect many businesses with a very low cost base, including limited company contractors providing services.

The new rules apply to “limited cost traders”, which are defined as businesses who spend less than 2% of their sales on goods (not services) in an accounting period.

For the purposes of this measure, HMRC has also redefined their definition of costs. When working out the amount spent on goods, it cannot include the purchase of:

  • Capital goods (such as new equipment)
  • Food and drink (such as staff lunches)
  • Vehicles or vehicle parts (unless running a vehicle hiring business)

Companies will also be classed as limited cost traders if they spend less than £1,000 per annum on goods, even if this is more than 2% of their turnover.

Real effects

Limited cost traders can still use the Flat Rate Scheme, but the new VAT percentage will be 16.5%.

VAT* If you pay VAT on several of your business’s costs, you may want to consider moving onto standard rate VAT which could pay for itself.

In the first instance, you should assess your trading activity and costs to determine whether you are a limited cost trader and consider setting aside funds to cover any increase in your Flat Rate Scheme level. The Boox app will do this for you.

Options from 1st April

1. Stay on the Flat Rate Scheme under the new rate.
This will happen automatically if you make no changes.

2. Remain on your current flat rate
You can only do this if you fall outside of the definition of a limited cost trader.

3. Deregister from VAT
If you fall below the deregistration threshold of £81,000 you can deregister from VAT.
If you want to do this, please let your Boox advisor know by email, and they will do this for you (or you can do it by logging into your VAT account).
You will need to prepare a final VAT return, tell your clients that you have stopped being VAT registered, and give them the date this is effective.

4. Move onto the standard VAT scheme
You could decide to leave the Flat Rate Scheme and account for VAT on the standard scheme, allowing you to claim back all your input VAT on your purchases.
There is more admin on the standard VAT scheme than the Flat Rate Scheme, as you are required to keep all your VAT purchase invoices for at least 6 years, and you will need to accurately record the net, VAT and gross of each purchase invoice.
This is probably the best approach if you are a limited cost trader and earn over £81,000 per year. If you want to move onto the standard VAT scheme, please let your Boox advisor know by email, and they will write to HMRC on your behalf. If you want to do this yourself the address to write to is:

HMRC
Imperial House
77 Victoria Street
Grimbsy
DN31 1DB

A word of warning…

HMRC have already made it clear that that paying or invoicing in advance in order to avoid the changes to the flat rate level will be considered as forestalling and have made provisions to tackle this.

Get in touch if you have questions regarding the changes to the Flat Rate Scheme

You can also contact HMRC’s dedicated VAT helpline on 0300 200 3700.

Lynne Gowers Written by Lynne Gowers

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