New 16.5% VAT Flat Rate for service-based businesses

with No Comments

It was announced in the Autumn Statement that from 1st April 2017, “businesses with limited costs, such as many labour-only businesses” will have their VAT flat rate percentage increased to 16.5%. HMRC refers to such businesses as “a limited cost traders”. For such businesses this will remove the benefit of being on the Flat Rate Scheme, which can amount to several thousand pounds per year in some cases.

Limited cost traders are businesses whose expenditure on goods (not services) is less than 2% of turnover per year. Businesses that spend less than £1,000 on such goods per year will also automatically be deemed a limited cost trader. The following expenditure will be excluded from the calculation of expenditure on goods: capital expenditure, food or drink for consumption and vehicles, vehicle parts and fuel.

This will impact on the majority of service based businesses operating under the Flat Rate Scheme as they will now be classified as a limited cost trader. The 16.5% rate will mean there is no VAT advantage to being on the scheme from the VAT saving point of view. The Flat Rate Scheme still remains simpler to operate under and does still reduce the administrative burden of preparing VAT returns.

Limited cost traders will now need to make one of the following decisions:

  • To remain on the Flat Rate Scheme at rate of 16.5% which means no savings by being on the scheme.
  • Leave the Flat Rate Scheme but stay VAT registered.
  • Deregister from VAT entirely (turnover must be under deregistration threshold or falling below it).

We can help you make this decision.

As with all of our tax tips and web pages this information is necessarily summarised and of a general nature.  If you would like detailed specific advice please contact us.