VAT: Changes to the flat rate scheme “Limited Cost Trader”
In the autumn statement as part of the “tackling aggressive use of the flat rate scheme”, HMRC announced that they will introduce a “limited cost trader" category into the VAT Flat Rate Scheme. The purpose of this being “to remove the cash advantage for those businesses with limited costs”.
For businesses that fall within the limited cost trader category a flat rate of 16.5% will apply, rather than the normal trade sector (e.g. other trade services which is currently 12%).
What is a limited cost trader?
A limited cost trader is where a business’ VAT inclusive expenditure on “goods” is less than 2% of its gross sales or £250.00 per quarter.
HMRC then goes on to exclude the following from “goods”:
motor expenses including fuel (with some exceptions for transport businesses)
food and drink
goods must be used exclusively for the purpose of the business with no private use
A business is expected to check each quarter if they fall under the definition of a low cost trader, if so the 16.5% rate must be applied, and if not they can apply the normal trade sector rate.
Who will this effect?
This will mainly impact clients in service sectors with a low-cost base. Using the 16.5% flat rate on gross turnover is the equivalent of 19.8% of the net. As a result businesses, could pay more VAT under the flat rate scheme, rather than the standard VAT scheme.
What action need to be taken?
Businesses that use the flat rate scheme need to review their position. If they are under the VAT deregistration limit (currently £83,000) they may look to deregister, or alternatively look to leave the flat rate scheme through writing to HMRC.