Changes To The VAT Flat Rate Percentage
As announced in the Autumn Statement, a new VAT flat rate of 16.5% applies from 1 April 2017 for “limited cost traders”. This is being introduced as HMRC believe that the current system is being abused by some businesses that have minimal costs.
The flat rate scheme was originally introduced as a simplification measure for small business as they merely pay a percentage depending on the type of business to their VAT inclusive turnover. From April some of these businesses will be better switching to the standard VAT scheme and if they do fall into the "limited cost trader" bracket, then their VAT bills will certainly increase
e.g. A training consultant who bills his clients £100,000 a year, £120,000 inclusive of VAT. Using the flat rate scheme he currently pays 12% to HMRC = £14,400. If the VAT inclusive cost of his goods for the year is less than £2,400 (2%) excluding capital expenditure, food, fuel, vehicle costs then he would have to pay £19,800 to HMRC. This means it is highly likely that he would be financially better to switch schemes, although some businesses may still choose to remain on the flat rate scheme for ease of use.
If you are currently using the VAT flat rate scheme contact us to discuss whether the changes will apply to you - if we prepare your VAT, then we will look at this for you in March, prior to the scheme starting.