Changes to the Flat Rate Scheme

The government continues to attack contractors next year by cutting the benefit of the VAT Flat Rate Scheme.  The changes affecting businesses with very low cost bases like IT, banking, project manager contractors, construction workers who supply labour but don’t purchase raw materials.
The bottom line is that if a business is classified as a “limited cost trader” their flat rate changes to 16.5% which is a smidgen less than an equivalent VAT rate of 20% i.e. they lose the benefit of keeping some of the VAT charged to clients.

Definition of a “limited cost trader”:

  • they spend less than 2% of their VAT inclusive turnover on goods in an accounting period; or
  • they spend more but less then £1,000 a year (a de minimus amount)

The amount spent on goods does not include the purchase of capital goods such as new equipment, food and drink and vehicles or parts of vehicles.

Limited cost traders who participate in the flat rate scheme from April 2017 onwards will have a fixed rate of 16.5%. This means that work sold for £120 with £20 of VAT will result in a flat rate VAT charge of £19.80.  The measure is designed to “shut down inappropriate use of the VAT flat rate scheme that was put in place to help small businesses”.

Businesses can voluntarily register for VAT before their turnover reaches the £83,000 VAT registration threshold so they can make use of the flat rate scheme and have a cash advantage.

Contact us if you would like further help or advice on this subject.

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