Changes to the VAT Flat Rate Scheme from 1/4/17

In the autumn statement the chancellor announced the introduction of a new flat rate for ‘limited cost traders’ (LCTs).

LCTs are defined as businesses who incur costs on goods in a return period amounting to less than the greater of:
• 2% of gross turnover
• or £250 a quarter (adjusted pro rata for longer or shorter periods).

It appears that this limit is to be considered separately for each return period from 1st April 2017.

Businesses will be responsible for using the new 16.5% rate if they come within the definition or the usual trade-related rate if not.

Note that only goods count, not services. Also excluded are capital expenditure goods, food or drink for consumption by the flat rate business or its employees, vehicles, vehicle parts and fuel (except if the business is one that carries out transport services, for example a taxi firm using its own or leased vehicles), and anything that is not used exclusively for business purposes.

For many small service based businesses, much of their costs will be services such as telephone, accountancy and travelling. As these are not included within the relevant costs, many will only be left with such items as stationery and computer consumables. This means that many businesses will need to consider coming out of the scheme.