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In November 2016, the Autumn Statement announced significant changes for businesses who use the flat rate scheme for VAT. These changes will be brought into effect from 1 April 2017, and will impact businesses with costs which are predominantly for services, as opposed to goods.

The flat rate scheme is a VAT scheme which essentially simplifies VAT for smaller businesses and allows for a set industry based percentage to be applied to the gross sales figure to ascertain the VAT payable. Previously, this therefore had advantages for service based businesses. However, this will change on 1 April 2017.

Any business that is defined as a ‘limited cost trader’ will be subject to the new 16.5% flat rate percentage with effect from 1 April 2017. Therefore, businesses can continue to use the flat rate scheme, although the business could be subject to the new rate if defined as a ‘limited cost trader’.

What is a ‘limited cost trader’?

A limited cost trader is 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

Please note that the above relates to goods NOT services.

Furthermore, goods for the purposes of this measure must be used exclusively for the business, and exclude the following items:

  • Capital expenditure (asset additions)

  • 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)

     

Who will this affect?

This will affect labour-intensive businesses where the amount of expenditure on goods is minimal. For example, this may effect consultants, architects, IT firms, hairdressers, estate agents, agricultural workers, recruitment agencies, builders who provide services only, and other tertiary sector businesses.

 

If you are a business and you would like further advice on the flat rate scheme and flat rate scheme changes, please contact a member of the Spirare Team.