Change to VAT flat rate scheme


Dec 01, 2016



As part of the Chancellor’s Autumn Statement 2016, a new VAT flat rate percentage of 16.5% will be introduced from 1 April 2017.

The VAT flat rate scheme is a simple scheme that enables small businesses to calculate and pay their VAT based on a flat rate percentage of total takings, rather than deducting input tax on purchases and expenses and then deducting that amount from the total output tax on sales in the period. The flat rate percentage varies depending on the nature of the trade, ranging from 4% for food retailers up to 14.5% for IT consultants and labour only construction workers.

However, HMRC believe that this scheme is being abused by certain traders who have minimal costs, and who charge 20% VAT to their customers and then pay a lower percentage over to HMRC. Hence this new 16.5% VAT flat rate percentage, which is a tax anti-avoidance measure expected to generate £695m for the government by 2021/22. It’s remarkable to reflect that this same flat rate scheme, which is now being badged as a ‘tax-avoidance device’, was until last week something HMRC were inducing traders to sign up for by offering an introductory discount off the applicable flat rate!

The new 16.5% rate will apply to “limited cost traders”, such as many labour-only businesses. These are businesses whose VAT inclusive expenditure on goods is either:

(a) less than 2% of their VAT inclusive turnover in a prescribed accounting period; OR

(b) less than £1,000 per annum if the prescribed accounting period is one year (if it is not one year, the figure is the relevant proportion of £1,000)

‘Goods’ excludes items of capital expenditure, food and drink consumed by the business, vehicles, vehicle parts and fuel (for businesses not involved in the transport service sector).

Anti-forestalling provisions have been introduced which are designed to prevent low cost traders from using a different rate beyond 1 April 2017. These anti-forestalling measures will also affect businesses which issue an invoice or receive payment before 1 April 2017, but don’t deliver their service until on or after 1 April 2017. The supply will be treated as taking place on 1 April 2017 and the 16.5% flat rate will apply.

Any business affected will almost certainly be better off returning to the normal VAT system with effect from that date. If you are currently using the VAT flat rate scheme please contact us to check whether this change is likely to affect your business.