We are making some changes to the VAT Flat Rate Scheme and, if you use the scheme, you may be affected. The Flat Rate Scheme is a simplification scheme not a tax allowance. More and more often it is being used for a cash benefit rather than for simplification. Some have been exploiting the scheme in this way, which is unfair to those businesses not eligible to use the scheme and to those using it for the purpose it was intended.
It is important that you understand these changes and what they mean for you.
What is changing?
From 1 April 2017 we are introducing an additional flat rate of 16.5%. This rate will apply to businesses in any sector, but only if you have limited costs. You are a limited cost business if the cost of your goods is below 2% of your turnover or below £1,000 per year. If your VAT return is for less than one year the figure is the relevant proportion of £1,000. For example, on a quarterly return the relevant proportion is £250.
What is not changing?
The existing flat rates will continue to be available for those flat rate businesses that do not qualify as a limited cost business.
How do I know?
There is a simple calculator available to help businesses work out whether you are a limited cost business – if you want to use the calculator, see VAT Flat Rate Scheme - How much you pay
Before you start you will need some basic information – use the information that relates to your most recent VAT return period. If you submit quarterly returns this will cover a 3 month period. If you submit annual returns this will cover a full year. You will need to know:
- your relevant turnover – this is usually the amount you put in Box 6 of your VAT return
- the cost of goods – goods must be used exclusively for the purpose of your business and certain goods are excluded from this test
The cost of goods excludes:
- any services;
- goods that are used for private purposes;
- capital items, for example, office equipment, laptops, mobile phones, tablets;
- food and drink that is consumed by you or your employees;
- motoring costs - unless your category of business is transport and you own or lease a vehicle for your business;
- goods that you resell, lease, let or hire out – unless this is normally part of your main business activity; and
- goods that you give away as a promotional items, gifts or donations.
Further guidance can be found in VAT Notice 733 (see below)
I am not a limited costs trader – what do I do next?
If you are not a limited cost trader you should continue to use the relevant VAT flat rate for your business sector. However, your business costs may change during your VAT reporting year. So before sending us your VAT return, you should check again to ensure you are applying the correct rate.
I am a limited cost trader – what do I do next?
If you decide to remain on the Flat Rate Scheme, you must use the new 16.5% rate from 1 April 2017.
Using the new rate may mean that you pay more VAT than you do now. You may wish to reconsider whether you still want to use the Flat Rate Scheme. If you are trading below the VAT threshold, you may wish to consider deregistration.
Where to find more information
VAT Notice 733 (Flat Rate Scheme for Small Businesses) provides detailed guidance on using the Flat Rate Scheme and these limited cost trader changes to the scheme.
Limited cost trader changes are detailed in sections 4.4, 4.5 and 4.6 including:
- how often to complete the test;
- what you can or cannot include as cost of goods; and
- how to account for VAT if your next return begins before the change on 1 April 2017
If you decide to leave the Flat Rate Scheme you must write (or e-mail) and tell us. We would expect that most businesses will leave at the end of an accounting period. However, you may leave voluntarily at any time during an accounting period. We will confirm the date you left the scheme in writing.
If you meet the requirements again, you can apply to rejoin the Flat Rate Scheme. But you will not be eligible to rejoin for a period of 12 months.
For more information contact:
P.O. Box 6
Isle of Man
+44 1624 648130
+44 1624 661725