To prevent perceived “aggressive abuse of the VAT flat rate scheme”, HMRC is to introduce a new status of “limited cost trader”.

With effect from 1 April 2017 all traders, whether already using the scheme or seeking to join it, must use a new 16.5% scheme rate if they are limited cost traders. This is equivalent to accounting for VAT at 19.8% on all supplies, with no credit for input tax suffered.
A limited cost trader is currently defined by HMRC as “one whose VAT-inclusive expenditure on goods [services are not mentioned] is either:

–  less than 2% of their VAT-inclusive turnover in a prescribed accounting period; [or]

–  greater than 2% of their VAT inclusive turnover but less than £1,000 per annum if the prescribed accounting period is one year (if it is not one year, the figure is the relevant proportion of £1,000)”.

HMRC adds that:
“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; [and]

–  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 to inflate their costs beyond 2%.”
It would be our advice for you to consider the impact of this on your business now and when preparing the VAT returns for our clients in the next quarter we will assess this on your behalf.  It may be a time to consider moving away from the flat rate scheme or, turnover allowing, deregister from VAT completely.

Whether the impact of businesses deregistering from VAT completely will outweigh the “aggressive abuse” HMRC are trying to prevent, will be seen in the future.

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