Changes to the VAT flat rate scheme could significantly affect the tax liability of small businesses that currently make use of the scheme.
The flat rate scheme simplifies the process of calculating how much VAT a business needs to pay or claim back from HMRC.
It introduces a fixed rate of VAT and businesses are allowed to keep the difference between what they charge customers and what they pay HMRC.
Currently there are different rates for different professions.
What is changing?
From April 2017, businesses with very low cost bases will be classed as “limited cost traders” if they spend:
- less than 2% of their VAT inclusive turnover on goods in an accounting period; or
- more than 2% of their VAT inclusive turnover but less than £1,000 a year.
Limited cost traders who participate in the flat rate scheme from April 2017 onward will have a fixed rate of 16.5%. This means that work sold for £120 with £20 of VAT will result in a flat rate VAT charge of £19.80.
Who will be affected?
The measure will increase the VAT bill of businesses that are labour-intensive but spend little on goods, such as IT contractors and consultants.
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