Chancellor implements new VAT flat rate
23rd November 2016 | News
Chancellor of the Exchequer, Philip Hammond, has announced the introduction of a new 16.5% VAT flat rate for businesses with limited costs in his inaugural Autumn Statement.
The VAT Flat Rate Scheme has been in existence to help reduce the administrative burden imposed on small businesses when operating VAT.
Under the scheme, a set percentage is applied to the turnover of the business as a one-off calculation instead of having to identify and record the VAT on each sale and purchase you make.
Hammond has opted to introduce a new 16.5% rate for businesses defined as ‘limited cost traders’, a move which could affect some contractors and service-based businesses with minor outgoings.
Who is a limited cost trader?
A limited cost trader will be defined as a business 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 £1,000 per annum if the prescribed accounting period is one year (if it is not one year, the figure is the relevant proportion of £1,000)
For the purposes of the limited cost measure, goods must be used exclusively for the business, but exclude the following items:
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 – e.g. a taxi firm – and uses its own or leased vehicle to work)
The exclusions of the above items are designed to prevent traders from buying low-value everyday items or one-off purchases in order to inflate costs beyond the 2% figure and escape the new 16.5% threshold.
How does the VAT Flat Rate Scheme work?
Businesses with total income of less than £150,000 are eligible to use the VAT Flat Rate Scheme.
The VAT due is calculated by applying a predetermined flat rate percentage to the business turnover of the VAT period
The percentage rates are predetermined according to the trade sector of your business, ranging from 4% to 14.5%.
What does it mean for you?
The Chancellor believes the new 16.5 per cent VAT flat rate will stamp out “inappropriate” use of the scheme, but the announcement is likely to harm service-based businesses such as contractors and consultants.
It will be crucial for businesses currently on the flat rate scheme to consider whether this applies to them. If the measure means the Scheme is no longer beneficial for them, they may have to revert to standard VAT accounting and must take action ahead of April 2017.
If you think you might be affected by this measure, please seek professional advice from an accountant before taking action. Your local TaxAssist Accountant would be happy to discuss your affairs with you in more detail.
The new VAT flat rate was the tip of the iceberg for small businesses in the Autumn Statement 2016, with SMEs left largely in the cold by the Chancellor.