The VAT Flat Rate Scheme for small businesses is a simplified scheme which allows eligible traders to calculate the VAT that they pay over to HMRC by reference to a fixed percentage applied to gross (i.e. VAT-inclusive) turnover.   Businesses with VAT taxable turnover of £150,000 a year or less can join the scheme.

Prior to 1st April 2017 the flat-rate percentage was determined solely by reference to the trade sector in which the business operated.   From 1st April onwards, it is necessary to consider whether the business meets the definition of a ‘limited cost trader’.   Where a company is a ‘limited cost trader’ the VAT that must be paid over to HMRC is worked out using a higher rate percentage of 16.5% of gross (VAT-inclusive) turnover for the period, rather than the percentage for the relevant business sector.

A limited cost trader is one that spends less than 2% of its VAT-inclusive turnover on ‘relevant goods’ or one which spends more than 2% of its turnover but less than £1,000 a year on relevant goods.   The 2% test must be applied for each VAT quarter.

The test is a harsh one as it only takes account of expenditure on goods, not on services.   Consequently, if a business spends a lot on VATable services but not much on goods, it may be classed as a limited cost business and may lose out in terms of recovering the VAT incurred on services.

If you use the flat rate scheme please call us on 01275 852255 to arrange a review as to whether this is still beneficial.