Changes to the Flat Rate Scheme

The change to the flat rate scheme is specifically designed to impact adversely on businesses such as consultants who have benefited from being able to retain the difference between the VAT payable to HMRC and the amount invoiced to their clients, and incur little by way of VAT on their business costs.

If the business meets HMRC's criteria to be a "limited cost business" it must use the flat rate percentage of 16.5% when calculating how much VAT to pay HMRC under the flat rate scheme. A limited cost business is one where the amount it spends on relevant goods including VAT is either:

  • less than 2% of their VAT flat rate turnover
  • greater than 2% of their VAT flat rate turnover but less than £1000 per year

Relevant goods are purchases of physical items from UK or non Uk suppliers but this definition does not include the cost of services, capital expenditure items or goods purchased for sale or lease by a business where this is not their normal activity

The change will mean that a business that previously used the 12% flat rate would now have to use the 16.5% flat rate. Up to 1 April 2017 the business would charge their customers £20 VAT on every £100 net sale and pay HMRC £14.40 VAT to HMRC. The business would benefit by retaining the £5.60 difference. From 1 April 2017 the business will pay HMRC £19.80 VAT and only retain 20p of the VAT they have charged.

Such businesses will need to monitor their costs and if they are liable to cease using their current rate they will need to change to the 16.5% percentage as they meet the limited cost criteria, or leave the scheme, making the flat rate scheme not that simple after all!

 

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