Flat Rate VAT`

Posted by admin - November 25, 2016 8:14 am Flat Rate VAT

With effect from 1 April 2017

In the Autumn Statement on 23 November 2016, Phillip Hammond announced the introduction of a new 16.5% VAT flat rate. This rate will be applicable to any business with limited costs and will take effect from 1 April 2017.

Under the current system the maximum rate of VAT is 14.5% depending on the business sector. The rate applicable to you is defined by your decision of which category best suits your trade sector. In addition to reviewing if your trade sector is correct, from 1 April 2017 all businesses will need to determine whether they meet the definition of a limited cost trader (details below).

As before, the onus is on the business to select and operate the correct flat rate percentage for each accounting period.

A limited cost trader will be defined as one whose VAT inclusive expenditure on goods is either:

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

Goods, for the purposes of this measure, must be used exclusively for the purpose of the business but exclude the following items:

  • capital expenditure
  • food or drink for consumption by the flat rate business or its employees
  • vehicles, vehicle parts and fuel (except where the business is one that carries out transport services – for example a taxi business – and uses its own or a leased vehicle to carry out those services)

For years, the flat rate scheme has been a good option for small businesses to benefit from reduced administration while often retaining extra income (depending on the flat rate applicable and costs payable by the business). With the introduction of this new rate, there will likely be many business that would be financially better off using another method for their VAT returns.

If you are currently using the flat rate scheme or considering registering for it, then please contact us to see if the scheme is still the right option for you.