As promised, we have now had a chance to review HMRC’s guidance regarding the changes to the VAT Flat Rate scheme.
To recap, the changes, which are to come into effect on 1st April 2017, affect what HMRC are calling “limited cost” traders. According to HMRC, a limited cost trader is one whose VAT inclusive expenditure on goods for the business is less than 2% of VAT inclusive turnover, or is more than 2% but less than £1,000 a year.
Any business deemed to be a limited cost trader will have to use a flat rate percentage of 16.5% regardless of the type of business.
Many purchases are excluded from the definition of goods, as is capital expenditure. Expenditure on services, for example accountancy fees, is not mentioned.
Most businesses in the services sector will now be classified as “limited cost” traders cancelling out the benefit of using the flat rate scheme.
HMRC have brought about these changes to stop abuses of the system which we understand were all taking place in the construction sector. It would therefore appear that HMRC have used a sledgehammer to crack a nut and are impacting businesses that they may not have intended to affect.
We will be watching carefully to see whether HMRC amend their guidance over the coming months to reduce the types of business affected by this change.
With effect from 1st April 2017, we will be reviewing all our clients to assess which VAT scheme is best suited to their individual circumstances and advising accordingly.