VAT Flat Rate Scheme

For many years the VAT Flat Rate Scheme was seen as a simplified method for businesses of all sizes in order to comply with VAT reporting regulations. In the Autumn Statement on 23rd November 2016 the Chancellor announced a number of significant changes to the scheme to deter potential exploitation and manipulation. These changes came into force on 1st April 2017.

The Flat Rate Scheme was brought in to simplify the perceived overly complex way in which VAT was reported to HMRC. To be eligible businesses must be registered for VAT and they must have a taxable turnover of less than £150,000. Under the scheme businesses apply a fixed rate to their gross turnover; VAT is not reclaimable on any purchases, except one single purchase of a capital item which is over £2,000.

The changes which were brought in on 1st April 2017 affect those with very low levels of expenditure. These businesses are classed as ‘limited cost traders’ if they spend less than 2 % of their gross turnover on goods in one accounting period, or more than 2% of their gross turnover but less than £1,000 per year.

Goods must be those purchased for use wholly and exclusively for business purposes and exclude capital items, food or drink and vehicles, fuel and associated running costs. The latter will only be allowable if the business operates transport services such as taxi or car hire services. These exclusions are intended to prevent businesses buying small, inexpensive items to raise their expenditure above the 2% benchmark.

If you have concerns about the way your business uses the Flat Rate Scheme then please do not hesitate to contact one of our team.