Posted: November 25, 2016
Article by Greg Mayne, our Director of indirect tax and VAT
Many smaller businesses benefit from the simplification and tax advantage that comes with using the VAT Flat Rate Scheme for small businesses. By way of a memory jogger this scheme applies to businesses with a taxable turnover of £150,000 or less, and allows the business to pay to HMRC a percentage of their income rather than the amount of VAT collected from customers. The ‘trade off’ for this is that VAT incurred on expenditure cannot
be recovered unless it is for a single capital asset of more than £2,000.
Details contained within the Autumn Statement announced amendments to reduce the benefit for those businesses that don’t buy in sufficient quantities of goods. Where the value of goods purchased is below 2% of the VAT inclusive turnover figure, or if more than 2%, less than £1000 per annum, the business will be defined as being a ‘limited cost’ business, and will be required to apply an increased flat rate percentage of 16.5%. This equates to a relative VAT rate of 19.8%, thereby making it quite unattractive as a method as there would be no ability to recover any VAT on expenditure, whereas a business operating on ‘normal’ VAT would charge 20% VAT and retain the ability to recover VAT on associated costs.
HMRC have been quite canny, and have prevented businesses that might be caught in this ‘limited cost’ trap from buying in large quantities of food and drink for subsistence, or fuel for vehicles (unless they are a transport-related business) and any capital items – these will be excluded from any values for calculating the purchases of goods for the business.
There is also ‘anti-forestalling’ legislation to prevent any such business from raising invoices and accounting under their existing flat rate percentage now when services will actually be provided after 1 April 2017 – any such manipulation will be deemed to take place on 1 April for Flat Rate calculation purposes (thereby potentially at the higher percentage).
Anyone in the labour only sector, IT consultants, lecturers and consultants, professional advisors or similar currently using the Flat Rate Scheme for VAT that might be caught under this ‘limited cost’ test should consider whether the scheme is still fit for their purposes.