Changes to the VAT Flat Rate Scheme

If you’re a bit of a tax buff you may already know about the changes to the VAT flat rate scheme. On the other hand, if the word ‘taxes’ makes you want to bury your head in the sand you may have ignored the changes that were announced as part of the 2016 Autumn Statement. To help you get to grips with the changes and work out whether they affect you we’ve put together this blog.

What is the Flat Rate Scheme?
The Flat Rate Scheme is a simplification measure for small traders with a turnover under £150,000 a year. Small business owners who use this scheme issue VAT invoices to their business customers as usual, but only account for VAT at a flat rate % of turnover. The flat rate is calculated dependent on the business sector and is often significantly less than the standard 20% VAT rate.

Why is the Flat Rate Scheme changing?
There have been reports that in the past the Flat Rate Scheme has been exploited, and this change in tax legislation has been put into place to tackle this perceived abuse.

What do the changes consist of?
In a nutshell, from the 1st April 2017 a new rate of 16.5% will apply for ‘limited cost’ traders that use the Flat Rate Scheme.

How might this affect your business?
The changes mean that any business currently using the scheme, or wishing to use the scheme will need to decide whether it is a limited cost trader (i.e. a trader whose VAT inclusive expenditure on goods is less than 2% of VAT inclusive turnover, or is more than 2% but less than £1,000 per year). Limited cost traders must use a flat rate percentage of 16.5% regardless of what type of business they are.

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 VAT-able costs. However, certain low VAT everyday purchases are excluded from the definition of ‘goods’ as is capital expenditure.

It’s worth noting that the percentage used for the flat rate scheme is different from the standard rater percentage used in the standard rate scheme (the 16.5% equates to just under 20% standard rate. For limited cost traders this means that if your turnover hasn’t exceeded the VAT threshold you may need to re-evaluate whether or not is is in your benefit to be VAT registered (more on this here).

What now?
Still find taxes a complete and utter nightmare? Have no fear! We’re always here to help you gain the clarity you need to help you feel in control. Just get in touch on info@thechichesteraccountants.com or call  01243 532490.

This blog was written by Monica Jervis, small business owner, founder of the Chichester Accountants and qualified accountant. If you’ve got any questions don’t hesitate to get in contact on Twitter, Facebook or Google+.

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