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Change to VAT flat-rate scheme for ‘limited-cost traders’

Change to VAT flat-rate scheme for 'limited-cost traders'

In our blog post on the Autumn Statement we highlighted a change to the VAT flat-rate scheme which we thought at the time would cause a headache for many small businesses. Now that we have draft legislation and a HMRC policy paper, we can confirm our position – and it’s bad news. The changes will leave thousands of businesses out of pocket, and will impose an additional administrative burden on many thousands more.

The VAT flat-rate scheme

The VAT flat-rate scheme is there to simplify the VAT process for small businesses. Briefly, rather than the trader having to account for and reclaim VAT suffered on their expenses, they can keep a small proportion of the VAT they collect in from their customers. The proportion is determined by the nature of the trade.

The proposed changes to the rules

The government wants to reduce the proportion of the VAT the business can keep where that business is a ‘limited-cost trader’. This term is defined in the draft legislation and is – broadly – a trader whose annual VAT inclusive spend on goods (excluding capital items, vehicle-related expenses, food or beverages and expenses not 100% incurred for business purposes) is less than the higher of £1,000 and 2% of the trader’s turnover.

Where the new rules apply, the business will pretty much lose all of the benefit they receive under the flat-rate scheme and may be better off deregistering (where possible) or coming out of the flat-rate scheme and applying the normal VAT rules (meaning extra paperwork).

All businesses will need to monitor their compliance with the new rules, meaning extra work when completing their VAT returns.

The new rules will apply from 1 April 2017.

Is this necessary?

It would appear that the government is doing this to shut down avoidance by some recruitment agencies, as exposed by the Guardian. However, the measure as drafted will impact on a large number of small businesses who are not abusing the rules. Its a shame that the government couldn’t find a better, more targeted way of doing this. Let’s hope that they will think again before the new rules become law, and we will be doing our bit to convince them by making our views known via the Chartered Institute of Taxation.

Going forward

Closer to April, we will be reviewing all of our clients who currently use the flat-rate scheme, and we will contact those who we think may be affected by the new rules.

If you would like some assistance or have any questions on the above or any other areas of accounting or tax, please contact us at hello@applauseaccountancy.co.uk 

Applause Accountancy Services Limited takes every care in preparing material to ensure that the content is accurate and up to date. However, no responsibility for loss for anyone acting from or refraining from acting as a result of this information can be accepted by Applause Accountancy Services Limited.


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