From 1 April 2017 a new category has been introduced for “limited cost traders”. HMRC have written to all businesses using the flat rate scheme explaining the changes and have also issued a revised VAT Notice 733 to cover the changes and how to apply them.
The change introduces a new flat rate of 16.5% to be used by limited cost traders. The 16.5% rate overrides the flat rate normally used by a business and is applied on a VAT period by period basis. For example, a business making quarterly returns may usually use the 14.5% flat rate, but in a particular quarter it qualifies as a limited cost trader and so for that quarter it must use the 16.5% rate. If in the next quarter it does not qualify as a limited cost trader it reverts to the 14.5%, and so on. Businesses that may be limited cost traders should check every time they are due to submit a VAT return to ensure that they use the correct rate.
If 1 April 2017 falls within a VAT return period the figures will need to be apportioned and the limited trader test applied only to the part of the period from 1 April 2017 to the period end. This may lead to two flat rates applying to one VAT period.
The “limited cost” test
If a trader spends less than 2% of the value of business turnover, or less than £250 per VAT quarter, on “goods” for use in the business then the trader is a limited cost trader for that quarter and must apply the 16.5% flat rate. The £250 limit is varied according to the length of the VAT period it applies to, so that for traders on annual accounting it is £1,000 in the VAT year, and if a VAT period straddles 1 April 2017 the limit could be £83 for a quarter ended 31 May 2017 or £167 for a quarter ended 30 June 2017.
The turnover is the turnover that is included in Box 6 of the VAT return (gross business income for businesses in the flat rate scheme).
“Goods” in this test excludes services, goods with any private use, capital expenditure (on equipment, furniture etc), subsistence (food and drink claimed as expenses), motoring costs (unless you run a transport business), goods for resale, leasing, or hire unless selling, leasing, or hiring out goods is part of your normal business activities, goods that are given away (for example as promotional items).
Note that gas and electricity are goods for VAT purposes but if there is any private use of the gas or electricity they cannot be included in “goods”.
Who are likely to be limited cost traders?
If you provide consultancy or labour-only services you are likely to be a limited cost trader for at least some, if not all, VAT periods.
What should you do?
If the 16.5% rate applies to your business you will probably pay more VAT than using the normal basis of accounting for VAT. You should speak to your accountant or tax adviser about whether you should change to normal VAT accounting or, if you do not have to be registered for VAT, whether you should deregister.