Flat Rate Scheme: Changes for limited cost businesses
HMRC have updated their Flat Rate Scheme VAT notice to provide some much needed further guidance for businesses who use the scheme. The revised notice replaces the November 2016 edition and includes the limited cost business test that comes into force from 1 April 2017.
Although this change won’t affect everyone, it is significant to those who are impacted.
Who will it affect?
It is likely to affect you if your main costs are services, vehicle and fuel costs, or you do not purchase many goods.
How do I know if I’m affected?
You will be classed as a ‘limited cost business’ if the goods you buy to use in the business cost less than either:
- 2% of your turnover
- £1,000 a year (if your costs are more than 2%)
If your VAT return is for less than one year, the figure is the relevant proportion of £1,000. For a quarterly return this is £250.
For some businesses it may be unclear if they are a limited cost business, especially if goods are close to the 2% threshold. To make this simpler HMRC have developed an online calculator to help businesses work out if they are eligible to pay the higher rate. The calculator can be used each time a VAT return is completed to clarify any uncertainty.
If I’m affected what are my options?
If you are limited cost business and want to continue to use the Flat Rate Scheme you should use the higher flat rate of 16.5%.
Alternatively, you can use the standard accounting scheme where your VAT is calculated from the VAT actually incurred on your costs and sales.
Will I still benefit from the Flat Rate Scheme?
The changes could mean that you will pay more VAT on the Flat Rate Scheme than on the standard accounting scheme. In this situation, you will need to assess whether the extra VAT costs outweigh the additional administration inherent under the standard accounting scheme.
For help and advice on the VAT Flat Rate Scheme contact Adrian Le Roux