Business As Usual During Covid 19

VAT Flat Rate Scheme – Limited Cost Traders

As noted before in summary a change to the Flat Rate VAT scheme was announced in the Autumn Statement. This change comes in to effect on the 1st of April 2017.

This change is intended to target businesses on the Flat Rate Scheme who would only be reclaiming a minimal amount of VAT if they were calculating VAT as normal. Thes businesses will be classed as Limited Cost Traders. A new rate of 16.5% for the flat rate scheme will be introduced which potentially means that people will be better reverting to the standard VAT schemes.

HMRC has defined a Limited Cost Trader as:

A limited cost trader will be defined as one whose VAT inclusive expenditure on goods is either:

  • less than 2% of their VAT inclusive turnover in a prescribed accounting period
  • greater than 2% of their VAT inclusive turnover but less than £1000 per annum if the prescribed accounting period is one year (if it is not one year, the figure is the relevant proportion of £1000)

Goods, for the purposes of this measure, must be used exclusively for the purpose of the business but exclude the following items:

  • capital expenditure
  • food or drink for consumption by the flat rate business or its employees
  • vehicles, vehicle parts and fuel (except where the business is one that carries out transport services – for example a taxi business – and uses its own or a leased vehicle to carry out those services)

These exclusions are part of the test to prevent traders buying either low value everyday items or one off purchases in order to inflate their costs beyond 2%.

So as you can see this is definitely targeted at contractors and the like who are operating through Limited Companies with low costs.

If you are on the Flat Rate Scheme and would like some help transitioning please do not hesitate to contact us. We will be writing to HMRC on behalf of our clients who are affected and helping them transition if they need to.

HMRC reference is here: https://www.gov.uk/government/publications/tackling-aggressive-abuse-of-the-vat-flat-rate-scheme-technical-note/tackling-aggressive-abuse-of-the-vat-flat-rate-scheme-technical-note



Flat Rate VAT pitfalls…….

The Flat Rate VAT Scheme (FRS) is a scheme that allows businesses with a turnover of under £150,000 to pay VAT on a fixed percentage of their gross turnover rather than the amount of VAT received less the amount paid out. This is supposed to reduce beaurocracy as the calculation of the VAT return is simplified. For people with few VAT’able exopenses such as contractors it is also usually beneficial to be in the scheme as often less VAT is due.

Seems great! But there are a few pitfalls that must be avoided…………………


  • No Backdating: The scheme entry can not be backdated. So if someone realises that it would have been beneficial to be in the scheme earlier then that is tough! The potential saving will only commence on joining the scheme.
  • Paying VAT on Zero Rated and Exempt Income: The VAT due is calculated on the total turnover even if no VAT was collected on sales. The percentages listed by HMRC for businesses here https://www.gov.uk/vat-flat-rate-scheme/how-much-you-pay attempt to take this in to account. So for example a food shop that would usually have a lot of zero rated sales has a very low percentage in the list. A calculation should be made before joining about whther it will be beneficial.
  • Choosing the wrong category: The list of business categories is vague. Recent tribunal cases have confirmed that HMRC will not retrospecively penalise people who choose a “reasonable” category.
  • Claiming Input Tax on Capital Goods: If a capital item like a van is purchsed and the total cost is more than £2,000 including VAT then the VAT can be claimed. This has to be goods and not services though even if the services like construction costs would be treated as capital for income tax.

So as you can see for a scheme that is all about simplification there is a lot of complexity!!!! If you would like advice on whether your business could benefit fromthe Flat Rate VAT scheme please give us a call.

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