New VAT flat rate scheme limited costs

Old flat rate scheme

Prior to 1 April 2017 the old flat rate scheme was very popular with many of our clients as they could earn an extra income under the scheme. Although they were not able to reclaim input VAT on expenses, they didn’t have to pass on the full 20% VAT charged to customers. Depending on their business category/sector they would pay a flat rate VAT less than 20% and so they could keep the difference.

New flat rate scheme for limited costs: 16.5%

The old scheme was originally designed to make things easier/quicker for small businesses to comply with quarterly VAT returns as it didn’t require businesses to record all their costs/expenses each quarter.

But in the Autumn Statement on 23 November 2016 the Government declared that businesses with limited costs were in effect “abusing” the flat rate scheme as their affairs were so simple they didn’t need it .

From 1 April 2017 businesses with limited costs would need to apply a much higher flat rate of 16.5%.

What are limited cost businesses?

A business will have “limited costs” if the gross amount it spends on relevant goods is either:

  • less than 2% of VAT flat rate turnover (ie gross UK sales)
  • more than 2% but less than £1,000 per year

Relevant goods include: stationery/office supplies, gas/electricity, stock, cleaning products etc.

They exclude services such as rent, accountancy fees, advertising, laptop/mobile and also electronic services such as software.

What is the impact of the new scheme?

If a business does not have limited costs or ….., then there is no impact and they can continue as normal.

For businesses with limited costs, the new flat rate scheme is 16.5%.

Example

Net sales £100,000

VAT charged to customers: £20,000

Gross sales: £120,000

Old flat rate scheme

eg consultant/contractor with flat rate of 14.5%

Flat rate payable is £120,000 x 14.5% = £17,400.

Profit on flat rate scheme is £20,000 – £17,400 = £2,600

So as long as input VAT on expenses is less than £2,600 then the flat rate earns an extra 2.6% for the business.

New flat rate scheme

eg any business meeting criteria of limited costs has a flat rate of 16.5%

Flat rate payable is £120,000 x 16.5% = £19,800.

Profit on flat rate scheme is £20,000 – £19,800 = £200

So this is a loss of £2,400 compared to the old scheme.

Normally most limited cost businesses will have more than £200 of input VAT, for example from accountancy fees, telephone bills, software/subscriptions etc. If so, then they should leave the flat rate scheme and claim input VAT under the normal scheme.

 

 VAT returns that straddle 1 April 2017

VAT returns for QE April and May 2017 will straddle the start date. The return has to be split into 2 periods, before and after 1 April 2017. The first period will be treated as under the old rules and the second period under the new rules.

 

Leaving the flat rate scheme

For businesses with limited costs and turnover below £83,000 pa it may be worthwhile to deregister for VAT completely to avoid the additional admin.

For businesses with turnover above £83,000, it may be best to leave the flat rate scheme. This can be done by writing to HMRC and requesting to leave. The normal leaving date will be the end of a VAT return period, but a leaving date of 1 April 2017 could also be requested.

Please contact us if you need help with this.