Flat-Rate VAT Changes


Flat- Rate VAT Changes

Flat Rate Scheme VAT – Autumn Statement

What is the Flat Rate VAT Scheme?

In our August 2016 newsletter we reviewed the scheme and it’s associated benefits/ drawbacks, the blog post can be found here.

What’s proposed to change?

From April 2017 a business using the the Flat Rate VAT Scheme will need to determine whether they meet the criteria of a limited cost trader (see below), if they do then the new 16.5% rate would apply.

Am I a limited cost trader?

A limited cost trader is a business that spends either of the below on goods (not services) in a prescribed accounting period:-

  • Less than 2% of their VAT inclusive turnover.
  • Greater than 2% of their VAT inclusive turnover but less than £1,000 per annum.

What goods qualify?

Firstly, they must be goods, not be deemed a service and be used exclusively for the purpose of business.

Secondly, the following items would be excluded when calculating the 2%:-

  • Capital expenditure e.g computers, plant & machinery & fixtures & fittings.
  • Food & drink for the consumption by the business or it’s employees.
  • Vehicles, parts & fuel (unless that is the principal activity of the business)

I’m a contractor/ freelancer and classified as a limited cost trader, what does this mean?

The new VAT rate will squeeze the previous VAT flat rate margin being made to a very minimal amount, see below example:-


£100,000 + 20% VAT = £120,000 x 14.5% (old rate dependent on activity) = £17,400 payable

New (limited cost trader)

£100,000 + 20% VAT = £120,000 x 16.5% = £19,800 payable

Margin lost = £2,600 – £200 = £2,400

Can I invoice upfront before 1 April 2017?

No, this would be deemed forestalling, which is covered in HMRC’s recent anti-avoidance release.

What happens now?

We await secondary legislation on 5 December 2016 for further clarification.

If you are unsure on any of the above detail, please do not hesitate to reach out to your accountant at djca.