Contractors: New flat rate VAT rules (Limited Cost Traders)
HMRC has released updated guidance regarding changes to the flat rate VAT scheme which come into effect on 1 April 2017. The advantage gained by using the flat rate scheme is going to be restricted for ‘limited cost businesses’. A limited cost business is one whose expenditure on goods (not services) is either less than 2% of its gross turnover, or if greater than 2% of its turnover, less than £1,000 per year. Expenditure on goods will specifically exclude vehicle expenses, food and drink and capital items, but will include such items as goods for resale, stationery and software.
If you are registered for the flat rate VAT scheme, you may be caught by this change. If so, from 1 April 2017 your flat rate will increase to 16.5% regardless of your business sector. It may therefore be beneficial for you to consider the impact of this new rate to your business. HMRC have an online calculator to assist with deciding if you are caught, which also lists items that are excluded from the test: https://www.tax.service.gov.uk/check-your-vat-flat-rate/vat-return-period
Please note, if you decide to leave the flat rate scheme, HMRC must be informed and you will not be eligible to re-join for 12 months.
Disclaimer - All information in this post was correct at time of writing.