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CH Accountancy
CH Accountancy

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Changes to the Flat Rate VAT Scheme Ahead

The flat rate VAT scheme is used by many businesses and was desiged to simplify the accounting for small businesses.  Under the scheme eligible businesses pay a flat rate of VAT based on their gross sales over to the tax man.  VAT can also be reclaimed on most capital purchases over £2000.  

However, changes announced in the last Autumn Statement will change the way the scheme works to stop missuse of the scheme.

A new rate of 16.5% was introduced for 'low cost traders'.  A low cost trader is a business where VAT inclusive purchases of goods is either less than 2% of their total turnover, or if more than 2% of total turnover expenditure is less than £1000 in total per year.  Purchases of goods do not include food and drink, capital purchases or vehicles (unless the business is a car hire company).  Services (such as rent, subcontracted labour, accountancy etc) are also excluded from the expediture.

From the 1st April 2017 all businesses that are low cost traders must use the new rate of 16.5%.  If your purchaes of goods are over the thresholds for a low cost trader than you are able to use the normal flat rate as previously used.

What this effectively means, is for any business that falls into the low cost traders category they will effectively be paying 19.8% of net sales, meaning there is virtually no advantage to using the scheme.  Therefore it the standard method of calculating VAT due in your VAT return will more than likely be more beneficial, and to withdraw from the flat rate scheme.

I will be reviewing all current clients who are currently using the VAT flat rate scheme to see if they fall into the low cost trader category and will be contacting them to advise on how to proceed.

If you are currently using the flat rate scheme, I urge to you consult with myself (contact me) or another accountant to see whether or not you will be affected.


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