Changes to the Flat Rate Scheme

In November 2016, the Chancellor of the Exchequer announced an introduction of a new 16.5% VAT flat rate for businesses with “limited costs”.

The new rate is effective from 1 April 2017.

The Flat Rate Scheme is a simplification measure for traders with an annual turnover of less than £150,000.  Traders using the scheme issue VAT invoices as normal, but only account for VAT at a percentage that is less than the 20% standard rate, depending on the traders’ business sector.  The difference in the VAT rates provides an allowance for input VAT since traders using the scheme cannot claim input VAT, subject to certain exceptions.

From 1 April 2017, traders using (or wishing to use) the scheme will have to apply a test to decide whether they are “limited-cost” traders.  A limited-cost trader is one whose VAT inclusive expenditure on goods for the business in a prescribed accounting periods is:

• less than 2% of VAT inclusive turnover; or
• more than 2% of VAT inclusive turnover but less than £1,000 a year.

If a trader satisfies the above test, then is required to use a flat rate percentage of 16.5% irrespective of the type of business the trader falls under.

Note, there is no mention of expenditure on services.

The new rate applies to supplies made after 1 April 2017.  In order to ensure that “limited-cost” traders do not use a flat rate of less than 16.5% after 1 April 2017, anti-forestalling legislation has also been introduced.

Under the anti-forestalling rules, if a VAT invoice is issued for services prior to 1 April 2017 for services performed on or after 1 April 2017, the supplies of the services will be treated as taking place on 1 April 2017.  If the invoice covers services to be performed in a period spanning 1 April 2017, an apportionment should be made on a fair and reasonable basis.

Similarly, if payments are received before 1 April 2017 for services to be performed on or after 1 April 2017, the supplies of services will be treated as taking place on 1 April 2017.  If the payment covers services to be performed in a period spanning 1 April 2017, an apportionment should be made on a fair and reasonable basis.

HMRC are due to introduce an easy-to-use online tool to help determine whether traders should use the new rate.

If you think you will be affected by the changes, or have any questions please contact us.