A new rate of 16.5% will apply for “limited cost” traders that use the Flat Rate Scheme, from 1 April 2017.
The Flat Rate Scheme is a simplification measure for small traders with an annual turnover of less than £150,000. Users issue VAT invoices to business customers as normal, but only account for VAT at a flat rate percentage of turnover. The rate is calculated depending on the business sector but is normally significantly less than the 20% standard rate of VAT. The percentage includes an allowance for input tax. There have been recent reports that the scheme is being abused by employment businesses supplying staff.
In order to tackle this perceived abuse, legislation is being introduced so that, with effect from 1 April 2017, any business using the scheme, or wanting to use it, will have to decide if it is a limited cost trader. A limited cost trader is one whose VAT inclusive expenditure on goods for the business in a prescribed accounting period is less than 2% of VAT inclusive turnover, or is more than 2% but less than £1,000 a year. Limited cost traders will have to use a flat rate percentage of 16.5% irrespective of the type of business. Certain low value everyday purchases are excluded from the definition of goods, as is capital expenditure. Expenditure on services is not mentioned.
Anti-forestalling legislation has also been introduced to ensure that any limited cost trader using the scheme cannot use a flat rate of less than 16.5% beyond 1 April 2017. This higher flat rate percentage will impact on the savings the scheme can deliver to users with lower VATable costs.
Draft legislation for comment will be included in the draft Finance Bill 2017 clauses due to be published on 5 December 2016. An online tool will be available to help scheme users decide if they need to use the new rate from April.
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