Upcoming Changes to the VAT Flat Rate Scheme

As part of the Autumn Statement, the government has stated that they are changing the Flat Rate VAT Scheme, ostensibly to combat “aggressive abuse” of the scheme. Unfortunately, the changes have the potential to affect many small businesses who are making legitimate use of the scheme. As such, we felt it was best to produce this quick guide on what to expect from these changes.

Introducing a New Category – “Limited Costs Traders”

Part of the changes we’ve been made aware of is the introduction of the Limited Costs Trader category. As a small business owner, you’ll need to work out whether you qualify as a Limited Costs Trader before you apply for the scheme, as this will affect how it works for you. 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 (if it is not one year, the figure is the relevant proportion of £1000).

Goods, for the purposes of this measure, must be used exclusively for the purpose of the business but exclude the following items:

  • capital expenditure;
  • food or drink for consumption by the flat rate business or its employees;
  • vehicles, vehicle parts and fuel (except where the business is one that carries out transport services – for example a taxi business – and uses its own or a leased vehicle to carry out those services).

What Does This Mean For Me?

Essentially, small businesses who fall into this category are going to end up paying more tax. The way the scheme used to work is that a small business would pay anywhere between 6.5% and 14.5% VAT tax to the government. This is changing to a flat rate of 16.5% for these ‘Limited Costs Traders’. Some businesses will therefore be affected more drastically than others by this change.

If you’re concerned about the effect this could have on you, or you’d just like to know more about these changes, you can contact us here at KA Farr & Co. We have a wealth of experience in dealing with these matters, and can help guide you and your business through these changes smoothly and easily. Call us today on 01704 211 434 or email us at info@kafarr.co.uk.