|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.