VAT Flat Rate Scheme Changes April 2017


As we rapidly approach the end of January and those last minute Tax Returns being filed before the 31st January deadline, many people will breathe a sigh of relief (tax bill aside!).  But with recent uncertainty regarding Making Tax Digital on the horizon and the implementation date and thresholds surrounding this, are there any more changes afoot that are of a more immediate concern?…… well potentially “Yes” especially for those businesses that are Vat Registered and use the Flat Rate Scheme for accounting for Vat.  Businesses with annual taxable turnover of up to £150,000 can register for the scheme but must leave it once annual taxable turnover exceeds £230,000.

Nestled within the Autumn Statement 2016 was the Government’s attempt to tackle what could be seen as an abuse of current legislation for businesses to make some money out of VAT by using the Flat Rate Scheme.

For those who are not familiar with the mechanics of the Flat Rate Scheme, put simply, you charge the current rate of VAT (20%) on your invoices to your customers, but when you come to calculate your VAT liability you apply a reduced percentage (relevant to the sector you operate in) to your Gross Turnover.  This reduced percentage takes account of input vat that would be expected to be incurred in that sector.

Businesses with very limited costs have been able to profit from this scheme and actually make some money from HMRC by registering to use this method.  Well this is all about to change from 1 April 2017.

Any business wishing to use the scheme will need to decide if it is a “limited cost trader”.  The definition being “a business whose Vat inclusive expenditure on goods is less than 2% of their Vat inclusive turnover in a prescribed accounting period” or “greater than 2% of their Vat inclusive turnover but less than £1,000 per annum if the prescribed accounting period is one year”.

So what if you are caught by this new rule change?…….. Unfortunately your flat rate percentage will rise to 16.5%.  This will certainly have an impact on those businesses who are currently benefitting from a lower percentage payable in their sector.

Tools have been promised from April 2017 to help businesses decipher if they fall within these new rules and more guidance is expected from HMRC in the meantime.  For those businesses who are currently eligible to use the scheme it will be imperative that they check their status from April to ensure the correct amount of Vat is paid over to HMRC.

Yet another change therefore coming into play in the near future to be aware of and to pro-actively manage with the assistance of your Accountant.

For any help and guidance on this issue, feel free to contact us.