Just as you think you’ve got to grips with submitting your quarterly VAT returns under the VAT flat rate scheme, the Government announced the introduction of a ‘limited cost trader’ in the Autumn budget. These new entities will pay a flat rate of 16.5% VAT with effect from 1st April 2017, replacing their existing sector flat rate.
Why have they introduced ‘limited cost trader’?
The change has been billed as a crackdown on ‘aggressive abuse’ of the tax system. Because companies on the VAT flat rate scheme can keep the difference between what they charge in VAT and what they pay to HMRC (which varies depending on what sector they are in but is less than 20%), the government took the view that larger companies were increasingly using this as a way to reduce their tax payments. According to HMRC it had ‘become apparent’ that there had been an explosion in applications for the flat rate scheme by companies set up by employment intermediaries.
What is a limited cost trader?
These are mainly service providers with a low cost base rather than those selling a product.
Consultants, accountants, IT contractors and freelancers look like they will be some of the most affected. You will be classed as a ‘limited cost trader’ if the goods you buy for your business cost less than either:
- 2% of your turnover or
- £1,000 a year (if your costs are more than 2%).
‘Goods’ include stationery, gas and electricity used solely for business, retail stock and software which is provided on a disk (!). Goods which don’t count as ‘goods’ include accountancy fees, marketing costs, travel costs including fuel (unless you are a transport business) food and drink for you or your staff, laptop or mobile phone for use by business, rent, insurance premiums and any software you subscribe to online. Plus any capital expenditure is not included.
HMRC has set up a calculator to work out whether you’re a limited cost business.
How much VAT will I need to pay?
If you are classified as a limited cost trader your VAT flat rate percentage will be 16.5% from 1st April 2017 regardless of your sector. Some key points to remember are:
- If you are in your first year of VAT registration you get a 1% reduction in your flat rate percentage and this reduction still applies
- If 1st April falls in the middle of your VAT accounting period you will need to split the return in two – with the second period starting 1st April 2017. The test doesn’t need to be done for the period before 1st April 2017 and the calculation for the second period shouldn’t include any turnover or supplies from the first period
- If your costs fluctuate then you will need to do the test for each VAT return to see if you are above the 2% or £1000 threshold
- Visit HMRC for a detailed explanation of the flat rate scheme and the changes.
Should I stay in the flat rate scheme?
The important question here is do you spend more than 1% of your turnover on VAT-able goods and services? If yes, it’s likely that you’ll be better off on the standard VAT scheme. Online accounting tools like QuickBooks make it a lot easier to track the VAT you’ve both charged and paid so calculating the VAT you owe under the standard scheme is a lot simpler than it used to be. If you decide to leave the flat rate scheme as a result of these changes then you need to write to HMRC who will the confirm your leaving date. As with all tax matters you should take expert advice from your accountant.