Do you use the VAT Flat Rate scheme to calculate the amount of VAT that you are required to pay? HMRC announced in the Autumn Statement that they will introduce a new 16.5% rate from 1 April 2017 for businesses with limited costs, such as many labour-only businesses, to prevent perceived abuse of the scheme. Guidance in
Notice 733, which has the force of law, will introduce anti-forestalling provisions.
From 1 April 2017, FRS businesses will have to determine whether they meet the definition of a ‘limited cost trader’. 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; or
- 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)
These exclusions are designed to prevent traders buying either low value everyday items or one-off purchases in order to inflate their costs beyond 2%.
Anti-forestalling provisions in the Flat Rate Scheme Notice 733 are designed to prevent any business defined as a limited cost trader from continuing to use a lower flat rate beyond 1 April 2017. HMRC will introduce an online tool that will help determine whether businesses should use the new rate.
You will need to consider whether you should deregister from VAT if you operate below the VAT threshold level or revert to normal VAT accounting.
