VAT FLAT RATE SCHEME ADVANTAGES RESTRICTED FROM 1ST APRIL 2017
In the Autumn Statement on 23 November 2016, the Chancellor of the Exchequer announced the introduction of a new 16.5% VAT flat rate for businesses with limited costs. This will take effect from 1 April 2017. These changes will cause the advantage of the flat rate scheme to be lost for most businesses and many will not find it economical to use.
In the new legislation, flat rate scheme users must also determine whether they meet the definition of a ‘limited cost trader’. For some businesses – for example, those who purchase no goods, or who make significant purchases of goods – this will be obvious. Other businesses will need to complete a simple test, using information they already hold, to work out whether they should use the new 16.5% rate.
A limited cost trader will be 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
This emphasis on ‘goods’ will discriminate against businesses who incur VAT on services such as rent, software licences, IT support, subcontractors, hiring, telecoms and any other intangible purchase. The term ‘goods’ for the purposes of this measure also excludes the following items:
- any goods that are part personal/ part business use
- capital expenditure of any goods which are bought to be used over a period of time (for example, longer than a year) even if they are not treated as assets for accounting purposes such as a printer
- food or drink for consumption by the flat rate business or its employees
- vehicles, vehicle parts and fuel
- entertainment/ gifts and any other goods acquired with the intention of giving them away or donation to a third party
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%.
Note that any attempt to invoice in advance for services to be provided on or after the 1st April 2017, will be treated as if the invoice was issued on the 1st April 2017.
Paying or invoicing in advance to avoid an increase in tax is known as forestalling. Anti-forestalling legislation was published on 23 November 2016.It is designed to prevent any business defined as a limited cost trader from continuing to use a lower flat rate beyond 1 April 2017.
This will affect a business that supplies a service on or after 1 April 2017 but either issues an invoice or receives a payment for that supply before 1 April 2017.
When considering the limited cost trader definition, any such supply must be treated, for VAT purposes, as taking place on 1 April 2017. Any invoice or payment that covers continuous supplies of services that cross this date must be apportioned.
If you have any queries, please contact us on 01373 229589 or HMRC’s VAT Helpline on 03000 200 3700.