The Government has become concerned that some small companies are being set up specifically to take advantage of the VAT flat rate scheme and other tax reliefs offered to small businesses. These companies typically offer labour-only sub-contract services and so do not incur much VAT on their costs.

In the Autumn Statement, a specific measure was announced to combat this perceived abuse.  On 1 April 2017 the Government intends to introduce an additional flat rate percentage of 16.5% (the highest percentage currently used is 14.5%) for “limited cost traders”.  A limited cost trader is a business that spends less than 2% of its annual turnover, or less than £1,000 (if 2% of turnover is less than £1,000), on goods that are used exclusively for the purpose of the business.  In this context “goods” excludes capital expenditure, food and drink claimed as subsistence, vehicles, fuel and vehicle parts (unless it is a transport business).

Anti-forestalling measures have been introduced so that businesses that may have to use the new rate cannot manipulate turnover by deferring or advancing sales around 1 April 2017.

Although the measure is clearly aimed at a particular type of business it may have a wider effect on other service businesses that legitimately spend little on materials but spend on other services or products that are supplied in digital form.  If you think you will be unfairly affected by the new rate there will be an eight-week window in which to make your views known.

For more information please contact your accountant or tax adviser or you can contact us.