30 March 2017

Flat Rate Scheme changes for limited cost traders

Businesses classed as 'limited cost traders' that use the Flat Rate Scheme should be aware of the changes coming into effect from 1 April 2017.

What is the Flat Rate Scheme?

The Flat Rate Scheme is designed to assist small businesses by making it simpler and more cost effective to account for VAT. The scheme does not allow the VAT incurred on expenditure to be recovered. Instead, it requires the business to charge 20% VAT on sales but allows them to account for a lower rate of VAT to HMRC. This rate is linked to the business’s sector or classification.  

What are the changes for limited cost traders?

HMRC updated the ‘VAT Notice 733: Flat Rate Scheme’ in February 2017 to include changes announced at the Autumn Statement for ‘limited cost traders’. These changes come into effect on 1 April 2017. From this date, businesses that fall under the heading of a ‘limited cost trader’ (predominately labour only businesses such as contractors) must apply a set Flat Rate Scheme percentage of 16.5%.

For many it will still be more cost-effective to use the Flat Rate Scheme, however, for some it may not.

From 1 April 2017, any business using or wanting to use the Flat Rate Scheme must decide if it is a limited cost trader. In order for a business to qualify as a limited cost trader, its VAT-inclusive expenditure on goods in a prescribed accounting period must be either:

  • less than 2% of its VAT inclusive turnover; or
  • more than 2% but less than £1,000 a year (for a quarterly return this is £250).

Limited cost traders will have to use a flat rate percentage of 16.5% irrespective of their type of business. It’s worth noting that certain low value everyday purchases are excluded from the definition of goods for the expenditure test, as is capital expenditure.

When calculating the amount spent on goods, businesses must include relevant goods – goods that are used exclusively for the purposes of the business. HMRC Notice 733 defines relevant goods as:

  • stationery and other office supplies used exclusively for the business;
  • gas and electricity used exclusively for the business;
  • fuel for a taxi owned by a taxi firm;
  • stock for a shop;
  • cleaning products used exclusively for the business;
  • hair products used to provide hairdressing services;
  • standard software, provided on a disk.

They should not include:

  • vehicle costs including fuel, unless operating in the transport sector;
  • food or drink for you or your staff;
  • capital expenditure goods of any value;
  • goods for resale, leasing, letting or hiring out if your main business activity doesn’t ordinarily consist of selling, leasing, letting or hiring out such goods;
  • goods that you intend to re-sell or hire out, unless selling or hiring is your main business activity;
  • any services.

Is it worthwhile remaining in the scheme?

We expect that many businesses will want to leave the scheme as it will no longer be of benefit to them. HMRC has announced via the Association of Tax Technicians (ATT) that they will now accept that businesses do not need to obtain HMRC approval prior to doing so. You can read the full guidance provided by the ATT here .

HMRC has also produced a calculator to help businesses quickly work out whether there is still a benefit to them remaining in the scheme. This calculator can be found here .

Please contact us if you have any questions about the changes to the Flat Rate Scheme. We can help you confirm if your business is classified as a limited cost trader, decide if purchases are relevant goods and help evaluate the effect of the changes.

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