The VAT flat rate scheme aims to simplify the tax affairs of smaller businesses (turnover of < £150,000) by allowing them to work out the VAT that they pay over to HMRC by applying a flat rate percentage to their VAT-inclusive turnover, rather than working out the difference between the VAT that they have charged and the VAT that they have incurred.
Prior to 1 April 2017 the flat rate percentage depended only on the sector in which the business operated – e.g. Hotels or Accommodation had a rate of 10.5%
From 1st April 2017 this has changed –
‘Limited Cost Traders’ – those businesses who’s relevant** goods cost less than either:
- 2% of your turnover
- £1,000 a year (if your costs are more than 2%)
Pay a higher rate of 16.5%.
A business that meets the definition of a limited cost trader must use a VAT flat rate percentage of 16.5% rather than that for its business sector.
**Relevant goods exclude capital expenditure, food or drink for consumption by the business or its employees, vehicles, vehicle parts and fuel (unless the business operates in the transport sector), goods for hire or resale unless that is the business’s main business activity, goods for disposal, such as promotional items, and all services.
For further information on whether this applies to you or whether you are eligible for the Flat Rate Scheme more generally please visit the HMRC website below or call the office.