What is the Flat Rate Scheme?
Normally the amount of VAT you pay to HMRC is the difference between the VAT charged by the business to its customers and the amount the business pays to its suppliers.
In a bid to simplify VAT, the Government introduced the flat rate scheme some years ago. This is where, if your taxable turnover is less than £150,000 over the next 12 months:
- you pay a fixed rate of VAT to HMRC based on you VAT inclusive amount billed to your customers
- you keep the difference between what you charge your customers and pay to HMRC
- you can’t reclaim the VAT on your purchases – except for certain capital assets over £2,000
Suppose you are an IT Consultant
If you make £250 a day on a particular contract, you will bill your client £250 plus VAT a grand total of £300. Under the flat rate scheme, when you come to complete your VAT return you won’t pay over the £50 you billed your client on the face of the sales invoice. Instead you apply you assigned rate for your industry (14.5% until 31 March 2017) and pay £43.50 (that’s 14.5% of the invoice total of £300).
As you can see there is a benefit of £6.50 on this daily rate of £250. Happy Days.
Why is it so good?
Apart from the benefit of actually making money through VAT as you can see above. You have:
- Reduced Paperwork
- A business registering for VAT for the first time and applying for the Flat Rate Scheme may be eligible for an additional 1% claim
So what changes were made in yesterday’s Autumn Budget?
From 1 April 2017 the Government is going to begin labelling some business ‘Limit Cost Traders’ which are businesses that spend less than 2% on goods, but not services, in its accounting period. A limit cost trader will have their assigned rate set at 16.5%, so using the example above the IT consultant will have to pay over £49.50 (16.5% of £300 invoice value).
Am I A Limit Cost Trader?
You may need a calculator to work this out….
Any business which spends less than £1,000 a year will be immediately considered a Limit Cost Trader, even if this is more than 2% of its turnover.
If you spend more than £1,000 a year on purchases and need to work out whether you are a Limit Cost Trader remember to EXCLUDE the following from your costs:
- The cost capital purchases (like a new computer)
- Food, drink and entertainment (like lunches for staff)
- Vehicles costs
The changes to the Flat Rate Scheme from 1 April 2017 stands to affect many labour intensive businesses, where costs of goods purchased are low – freelancers, consultants and even accountants may be considered a Limit Cost trader.