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Author: JP / / Latest News

Are you a VAT registered, labour intensive business, using the Flat Rate Scheme?

By this we’re typically looking at the likes of consultants, labour only construction workers etc where there are very few purchases/expenses.

Most of these types of trader if operating the VAT Flat Rate Scheme are on a rate of 12% or 14%.

From 1 April 2017 a new category is introduced, “Limited Cost Trader”.

This overrides all other categories if it applies. The rate for this category is set at 16.5%

On a sale of £100 (£120 including VAT) this means £19.80 VAT is payable to HMRC leaving only a 20p “allowance” for input VAT.

So where many of these traders were on the flat rate scheme as it actually gave a benefit, this will no longer apply.  Some traders did not even need to be registered, being below the registration threshold, but registered to access this benefit.

Traders need to decide if they need to change their percentage to 16.5% from 1 April 2017 and if so decide whether they:

  1. a) continue on the flat rate scheme
  2. b) leave the flat rate scheme and operate normal VAT accounting – remember you have to advise HMRC if you are leaving the scheme
  3. c) deregister for VAT if turnover is below the deregistration threshold (£81000)

So, what is a “limited cost trader”?

Well, if spending on “relevant goods” in the VAT quarter is either less than £250 (inc VAT) or less than 2% of VAT inclusive sales for the quarter, you are a “limited cost trader” and pay VAT at 16.5% of gross turnover.

“Relevant Goods” excludes road fuel and motor parts, food, drink and capital items (vehicles, computers, furniture etc). Supplies of gas and electricity are included as goods (but only if 100% for business use) but rent, phone, internet charges, accountancy fees are services, so excluded.

Most traders in these categories incur very few costs that will be included.

Note that the calculation should be done each quarter and hence the percentage rate to apply can move up and down.

Example

Jim is a health and safety consultant and for VAT quarter ending 30 June 2017, his gross sales figure was £10,000 including VAT.  His VAT inclusive spending on relevant goods for the same period was £240.

He must adopt the 16.5% rate and pay £1650 of VAT if the £240 spending on goods is:

  • Less than 2% of sales (£10,000 in my example ie £200) or
  • Less than £250 in a quarter.

So a total goods figure of £240 including VAT passes the first bullet test but not the second – so the 16.5% rate must be applied.

More details can be found at:

https://www.gov.uk/government/publications/vat-notice-733-flat-rate-scheme-for-small-businesses/vat-notice-733-flat-rate-scheme-for-small-businesses#introduction

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