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March 17, 2017

A Quick Note on Changes to the VAT Flat Rate Scheme

If you run a small business in the UK and use the VAT Flat Rate Scheme you will (hopefully) aware that changes are coming in from 1st April.

If your business falls into the new category of “low cost trader”, then the rate you pay to HM Revenue and Customs will change to 16.5%. That means that, for every £1,000 you invoice to your customers plus 20% VAT (=£1,200), you will pay the HMRC 16.5% of the gross amount when it comes to your VAT return (= £198). That leaves you the grand total of £2 to cover the VAT on the goods and services that you buy in (i.e. £10 + VAT worth of goods and services).

Tough eh?

There is only one way you can avoid being classed as a “low cost trader”:

  • Your purchase of “goods” for your primary business exceeds 2% of your VAT inclusive (gross) turnover in the relevant VAT quarter; AND
  • The cost of “goods” bought for your primary business exceeds £1,000 per annum inclusive of VAT

Note the words “goods” here. These must be physical goods bought for the purposes of your main business. SERVICES DO NOT COUNT!

This means that if you are a builder, plumber and other trades-person who consumes stock in your work, you will likely avoid the “low cost trader” label and can continue to use the Flat Rate Scheme you currently use.

It seems to me also that if you operate a hotel, guest house or provide catering, your purchase of food and other goods for use in your trade will mean that your purchases exceed the limits set out.

However, if you are (like me) a consultant, accountant, trainer, or someone who provides advice or your labour as your business, you are likely to fall into the “low cost trader” bracket, unless you somehow consume physical goods in your work.

Be aware that the purchase of “services” does not count. This means hotel accommodation, travel, venue costs, professional fees and so on cannot be counted as a “purchase of goods”. Similarly capital expenditure, food for consumption by employees, and vehicles or vehicle parts do not count (unless operating a transport business).

And be careful of devising some cunning wheeze to avoid the “low cost trader” label! I have heard stories of small businesses considering buying goods and then selling them on (even at cost) so that their purchase of goods exceeds the limit. This will not work. The “goods” only count if they are to serve the main purpose of your business.

If (like me) you do fall into the “low cost trader” category you have three options:

  • Suck it up! Continue to use the Flat Rate Scheme and accept that your rate to pay the HMRC will be 16.5%. That is probably what I will do.
  • Leave the Flat Rate Scheme and use the “standard” VAT system accounting for the VAT on your income and set it against the VAT on all your purchases. This is too much hassle for my one-person business but may suit many
  • Deregister for VAT if your revenue (exclusive of VAT) is less than £83,000 per annum.

I make no political comment, though the 16.5% rate does seem harsh. The new rate will arrive on 1st April and, if you are a service provider on the Flat Rate Scheme, you need to consider your options. Do it now.

Please note that I am not a tax professional. This article is meant to provide information to help you plan. I make no recommendation of what you should do. If you think you have a chance of avoiding the “low cost trader” rate, you should seek professional advice before making any final decisions.