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VAT flat rate scheme changes


By: Rob Geary Date: 6 March 2017
Category: VAT,Tax

Back in November, we shared early details of the changes being proposed to the VAT flat rate scheme. Further details of the changes have since been published by HM Revenue and Customs (HMRC).

Some of the key points to note are as follows:
  • every flat rate scheme business must test their VAT return figures to see if the business spends less than 2% or £1,000 per annum (2% & £250 per quarter) on ‘relevant goods’. If it does it will be considered a ‘limited cost business’
  • when considered a limited cost business the flat rate to apply will be 16.5%; irrespective of the flat rate for the business sector
  • this test must be carried out for every accounting period (yearly or quarterly) and it is possible to pass the test in one period and fail it in another. In such cases you would apply the normal flat rate when the test is passed and the limited cost rate of 16.5% when the test is failed
  • HMRC offer a calculator service to work out if you pass or fail the test. It can be found here
  • the new rules come into effect on 1 April 2017. Any VAT returns that span this period must be calculated in two parts, effectively a ‘before and after’ period and the return submitted accordingly
  • every care should be taken to consider whether the business should remain on the flat rate scheme or leave it and account for VAT normally. Alternatively, where the turnover is below the VAT de-registration threshold, currently £81,000, (the threshold goes up to £83,000 on 1 April 2017) then consider whether the business would benefit from de-registering for VAT.


Examples of relevant goods:
  • stationery and other office supplies to be used exclusively for the business
  • gas and electricity used exclusively for your business
  • fuel for a taxi owned by a taxi firm
  • stock for a shop
  • cleaning products to be used exclusively for the business
  • hair products to use to provide hairdressing services
  • standard software, provided on a disk


Examples of expenses that aren’t relevant goods:
  • accountancy fees - these are services
  • advertising costs - these are services
  • an item leased/hired to your business - this counts as services, as ownership will never transfer to your business
  • food and drink for you or your staff - these are excluded goods
  • fuel for a car - this is excluded unless operating in the transport sector using your own, or a leased vehicle
  • laptop or mobile phone for use by the business - this is excluded as it is capital expenditure
  • anything provided electronically, for example a downloaded magazine - these are services
  • rent - this is a service
  • software you download - this is a service
  • software designed specifically for you (bespoke software) - this is a service even if it is not supplied electronically


Should you have any queries please contact Liz Hill or Rob Geary in the VAT team.
 
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