Posted by Paul Bulzacchelli on 10 April 2017 | Comments

Significant changes have been introduced to the amount of VAT that many small businesses will now have to pay.This will affect businesses that use the VAT Flat Rate Scheme which is for small businesses with limited costs.

Normally a business deducts the VAT on its inputs (what they buy) from the VAT charged on what they sell (outputs). However, under the Flat Rate Scheme, businesses charge 20% and on their outputs and before 1 April 2017, they then deducted and paid a pre-determined percentage to HMRC. Businesses previously determined which flat rate percentage to use by referring to the assigned percentage for their trade sector.

From 1 April 2017, businesses must now determine whether they meet the definition of a limited cost trader in order to be eligible to use the new 16.5% rate which is applicable to all trade sectors.

A limited cost trader is defined as a business that spends less than 2% of its sales on goods (not services) in an accounting period. A business will also be a limited cost trader if it spends less than £1,000 a year, even if this is more than 2% of the firm's turnover on goods.

If you are a limited cost trader, you must apply the 16.5% VAT flat rate to all invoices raised from 1 April 2017. This means that work sold for £120 with £20 of VAT will result in a flat rate VAT charge of £19.80 - the key point is you are now paying over the large majority of the VAT that you are collecting, so you may wish to consider deregistering for VAT if your business generates less than the £83,000 per year threshold.

If you are not a limited company cost trader, you should continue to use the relevant VAT flat rate for your trade sector. However, you will need to carefully monitor your expenses during each VAT period to ensure you apply the correct rate – e.g. If you pay VAT quarterly and your costs fall under £250 (one quarter of the maximum £1,000 annual limited cost trader amount), you will be deemed to be a limited cost trader for that period and must apply the 16.5% VAT rate.

We have produced a factsheet on the changes which can be downloaded here. However, please contact us if you would like to discuss how this impacts your business.Changes to the VAT Flat Rate Scheme