New VAT flat rate for ‘limited cost’ businesses

Articles 04.04.2017 Authors: Ian MacGillivray, Thomas Adcock

HM Revenue & Customs (HMRC) are always on the lookout for what they perceive as abuses of the tax system. They think they are losing VAT revenue because businesses are using a flat rate which benefits the taxpayer rather than HMRC.

Businesses can use the flat rate scheme if their turnover does not exceed £150,000. They pay VAT based on a sector-dependent percentage of their turnover and cannot claim VAT incurred on their purchases (other than for capital items used in the business but not consumed by it).

A new rate of 16.5% of turnover applies from 1 April 2017 for ‘limited cost’ businesses. These are defined as those whose cost of goods is below 2% of their turnover or less than £1,000 per annum. HMRC say that goods include stationery, office supplies and cleaning products, gas and electricity, stock for a shop but not capital expenditure e.g. laptops and furniture, excluded items like food and drink for staff and fuel for businesses not in the transport sector and not services such as rent, leased or hired items, downloaded or bespoke software. HMRC say that these lists are not exhaustive.

If your cost of goods hovers above and below the limit, then you will need to determine the rate at each quarter to work out whether to use the rate for your sector or the 16.5% rate.

This rate is harsh. If you have a turnover of £30,000 per quarter (which equates to £25,000 plus 20% VAT of £5,000), then the VAT due if you do not use the flat rate scheme will be £5,000 less tax on all eligible purchases. If you fall within the definition of a ‘limited cost’ business, your VAT liability will be £4,950 less VAT incurred on capital items. This effectively means you receive an allowance of only £50 for VAT on all goods and services. If your business is affected by this change you may wish to consider a change to the standard method.

Further information

Please contact one of our tax specialists if you would like to discuss the new rate.

About the Authors

Ian MacGillivray

Tax Consultant +44 (0)20 7309 3907

Thomas Adcock

Partner +44 (0)20 7309 3856