On the 5th December 2016 the HMRC released the Tackling aggressive abuse of the VAT Flat Rate Scheme- technical notes. This document went into the details of the new VAT Flat Rate Scheme. Below we have highlighted the key points everyone should know.
Why have these changes been introduced:
These changes have been introduced to crack down on those who misuse the VAT flat rate scheme.
The new rules will be introduced from 1 April 2017.
- These will primarily affect Limited Cost Businesses
What is a Limited Cost Business:
You'll be classes as a 'limited cost business' if your goods cost less that either:
2% of your turnover
£1,000 a year (if your costs are more than 2%)
This means that you must pay a higher rate of 16.5% of your takings
You can check if you need to pay the higher rate by using the below link
When working out the amount spent on goods, the following purchases cannot be included:
Food and drink (such as staff lunches)
vehicles or parts for vehicles (unless running a vehicle hire business)
Who will be affected:
The introduction of this new scheme will increase the VAT paid by labour-intensive business who spend very little on goods. e.g. IT contractors, photographers and consultants.
How to stay compliant:
HMRC estimate that for 4,000 businesses it will be cheaper to switch to standard VAT accounting.
For a detailed guide on VAT: https://www.gov.uk/topic/business-tax/vat
The government have introduced a calculator to check if you need to pay the higher rate
The flat rates for types of business have not been updated yet, it is unknown how much these will change. Current rates can be found: