Flat Rate VAT Scheme Changes for Limited Cost Businesses

Flat rate VAT is a scheme open to smaller business where HMRC collects roughly the same amount of tax they would under the normal scheme but it’s simpler for the smaller business to operate.


Flat rate VAT limited cost – how does flat rate VAT work?

With normal VAT, you add up all of your input VAT (what you pay when you buy goods and services), then add up all of your output VAT (what you charge your customers), and then subtract the input VAT from the output VAT to work out how much to pay HMRC (or how much you’ll be refunded).

Flat rate VAT does away with all of that.

You simply take your VAT-inclusive turnover every quarter, keep aside a fixed percentage of that turnover, and then pay it across to the taxman.


Flat rate VAT limited cost – an example of how it works

Let’s say that you’re a food wholesaler. Your flat rate VAT rate is 7.5%.

You get an order in for £250 + VAT, giving a total of £300 including VAT. You keep aside 7.5% of that transaction for VAT purposes, equivalent to £22.50.

That £22.50 and 7.5% of every VAT invoice you issue is what’s added together at the end of every quarter to come up with your VAT bill.

You can register for flat rate VAT by filling the online VAT600 FRS form. If you like, you can also apply for the annual accounting scheme and make VAT payments monthly if you have very variable cashflow by completing the online VAT600 AA/FRS form.

You can join the scheme under the following conditions:

  • you’ve not committed a VAT offence (like evasion) in the past year
  • you haven’t been part of the flat rate VAT scheme for the last twelve months
  • you’re a member of a margin or capital goods VAT scheme
  • you haven’t joined, or could have joined, a VAT group in the last 2 years
  • you’ve not become VAT registered as a business division in the last 2 years
  • your turnover is less than £150,000 per annum

Smart Team note – under flat rate VAT, you can claim the VAT on purchases of over £2,000 including VAT. Examples of this given by HMRC include

  • a computer system bought as one package,
  • items of kitchen equipment bought for a restaurant bought all at once from the same supplier
  • a van leased or hired over more than one year where your business will never own the van
  • a van bought on hire purchase costing more than £2,000 where your business will own the van


Flat rate VAT limited cost – what’s changing for limited cost businesses?

HMRC defines a limited cost business as one:

  • which spends less than 2% of their flat rate VAT turnover on goods and services which they are charged VAT for, or
  • where 2% or more of the VAT flat rate turnover is spent on goods and services which they are charged VAT for but where that cash amount is less than £1,000 per year.

These limited cost companies have had their flat rate VAT percentage raised by HMRC to a standard 16.5%.

HMRC have an online questionnaire to determine whether you’re a limited cost trader or not – click here.


Flat rate VAT limited cost – why make the change?

HMRC has expressed concern that companies in some trades have derived an unfair benefit from flat rate, particularly contractors.

When you fill out the questionnaire linked above, you’ll not be allowed to consider the following costs when determining whether you are a limited costs trader or not:

  • capital expenditure
  • food and drink
  • vehicles*
  • vehicle parts*
  • fuel*
  • contractor accountancy fees
  • advertising and marketing expenditure
  • electronically downloaded services
  • downloaded software
  • bespoke software
  • office rental costs

(* except for transport-related businesses).


Flat rate VAT limited cost – if I am classed as a limited costs trader, should I leave flat VAT?

It depends on your company. We’re already going through our client database one-by-one and we’ll be contacting those possibly affected to offer advice. If you want to speak with someone about it now, please call Smart Team on 01202 577500 or email us at info@yoursmartteam.co.uk.

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