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22nd March 2017

Why the change?

The rule changes have come about back in 2017 as HMRC seek to tackle aggressive use of the VAT flat rate scheme – in effect businesses that have incorporated purely because of the fact that being VAT registered on the flat rate scheme can make a company a tax-efficient vehicle.

HMRC are currently in the process of contacting businesses using the flat rate scheme, so if you are using the scheme, you may well have now received correspondence from them on the changes.

You can find out further information on the changes on the government’s site here.

What does this mean for your company?

HMRC introduced a new flat rate of 16.5% for limited costs traders, which will apply to businesses in any trade sector. You will be considered a limited cost trader if the amount you spend on relevant goods (including VAT) is either:

  • Less than 1% of your turnover
  • Greater than 2% of your turnover, but less than £1,000 per year.

Most personal service companies (PSC) will be deemed limited cost traders because they have little or no expenditure on relevant goods.  Relevant goods would include as an example, stock for resale, stationery, office supplies, or software on a disk.  The typical expenses that a PSC might incur, such as accountancy fees, subsistence, mobile phone, and laptop are all excluded from the list of relevant goods.

In effect this change will result in 19.8% of the 20.0% VAT charged, being payable to HMRC.  As an example, a Management Consultant with a turnover of £100,000 per year might typically find that they are £2,400 per year worse off next year, compared to now if they remained on the Flat Rate Scheme.

What are your options?

For those companies that would be paying more VAT under the limited cost trader status, the most likely preferred option from a financial perspective is to leave the VAT flat rate scheme and join the VAT standard scheme.

If you are trading below the VAT registration threshold (of £85,000), you may decide to deregister.

What are the advantages of being VAT Registered?

It is worth remembering that VAT registration has the advantages of making a business appear bigger and more established, indeed some businesses will only deal with VAT registered businesses. You can also, of course, reclaim the VAT on business expenses if you join the VAT Standard Scheme.

What to do next?

After you have reviewed your own situation, contact your accountant who will then write to HMRC on your behalf and request to switch over to the standard scheme or deregister.

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