Chancellor Phillip Hammond used his first major fiscal statement in December 2016 to announce that the government would be making changes to the flat rate VAT scheme.
From April 2017, a new 16.5% rate will be introduced for businesses with limited costs. What does this mean in practice and how will it affect business tax bills?
The flat rate scheme
Businesses turning over less than £150,000 each year are able to simplify their VAT payments via the flat rate scheme.
The scheme enables businesses to pay a fixed rate of VAT to HMRC. The rate will depend on what type of business you are but all are lower than the current 20% standard rate.
Businesses also keep the difference between the 20% rate charged to their customers and the reduced rate paid to HMRC.
The ‘limited cost’ business
From April 2017, a business operating through the flat rate scheme could be designated as ‘limited cost business’.
This new classification will be determined by how much a business spends on buying its goods. A business will be seen as ‘limited cost’ if it either:
- spends less than 2% of its annual turnover on buying its goods
- spends up to £1,000 each year on goods (if its costs exceed 2% of turnover).
‘Goods’ are defined as anything used exclusively for the purposes of doing business, excluding the following:
- capital investment
- vehicles, vehicle parts and fuel
- food and drink used by the business.
All businesses designated as ‘limited cost’ will be subject to a new 16.5% flat rate of VAT. For many businesses using the flat rate scheme, this will constitute a substantial increase to their VAT bill.
Unsure whether you face increased VAT bills in the upcoming tax year?
If you use the flat rate scheme and think you may be classified as a limited cost business, it is essential that you act now to mitigate the negative effects of an increased VAT bill. Contact us or call us on 0161 477 6789 for more information.