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Changes to VAT Flat Rate Scheme

In April 2017 the flat rate scheme changed.

To give you a little insight we have outlined some key points below:

Businesses on the flat rate scheme or registering for it need to consider whether they are a “limited cost trader”.

So, what is a “limited cost trader”?

To be classified as a limited cost trader the expenditure you make exclusively for business purposes on goods (not services), excluding capital, subsistence and most motor costs to name a few is either;

  • Below 2% of your VAT inclusive turnover in an accounting period or,
  • More than 2% of your VAT inclusive turnover but less than £1,000 a year, or £250 per quarter.

Who is this likely to affect?

The most obvious businesses affected will be the labour intensive ones who generally spend very little on goods, such as IT Consultants, web-designers and accountants to name a few.

So if you are a limited cost trader you will need to be paying HMRC 16.5% of your gross turnover.

If your business does not have limited costs then you continue to use your appropriate sector rate.