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VAT Flat Rate Scheme - changes amnnounced in the Autumn Statement

The Chancellor announced in the Autumn Statement that the VAT Flat Rate Scheme will be significantly changed for businesses known as 'Limited Cost Traders'.

A Limited Cost Trader is one which spends less than 2% of its sales value on goods (not services) or less than £1,000 on goods per year. For the purposes of the VAT Flat Rate Scheme, 'goods' excludes subsistence costs, expenditure on vehicles or parts of vehicles and capital expenditure.

From 1 April 2017 the flat rate percentage for Limited Cost Traders will increase to 16.5%. At present the highest rate, under the VAT Flat Rate Scheme is 14.5%.

At a Flat Rate percentage of 14.5%, the 'gain' on using the VAT Flat Rate Scheme is £2.60 per £100 of net sales. For Limited Cost Traders using the 16.5% rate from 1 April 2017, the 'gain' will be only £0.20 per £100 of net sales.

For a business with net sales of £80,000, the 'gain' would be £160 per year at 16.5%, compared to £2,080 per year at 14.5%. For a Limited Cost Trader registered under the category of 'Any other business not listed elsewhere' having a VAT Flat Rate Scheme percentage of 12.0%, the annual loss from changing to the 16.5% Flat Rate Scheme percentage is a staggering £4,320! To recover this loss, such a business would need to increase its sales prices by over 5%.

A business having £80,000 of net sales, currently registered at 14.5% under the Flat Rate Scheme and having £2,500 of net inputs for VAT, will have the following options from 1 April 2017:

a) Continue to be registered under the VAT Flat Rate Scheme and recover £160 per year (or £40 per quarter).

b) Deregister for VAT (the current deregistration limit is £81,000).

c) Withdraw from the VAT Flat Rate Scheme and recover £500 of input VAT. This would result in a considerable additional administrative burden on the company.

A small business with turnover above the VAT deregistration limit will have to choose between option a) and c) above.

For businesses which use commercial vehicles, it may well be worthwhile remaining VAT registered in order to recover the input VAT when vehicles are purchased.




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Tony Shackleford
Tony Shackleford

Chartered Accountant offering support to Limited companies and the self employed.

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