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As part of the autumn statement, the Chancellor of the Exchequer announced plans to change the flat rate percentage for businesses that would be considered as limited cost traders, with the introduction of a flat rate percentage of 16.5% for any business that would fall in this category.

In this blog post, catch up with the proposed changes to the flat rate VAT scheme and what it may mean for contractors. Gorilla Accounting are able to offer guidance for contractors in relation to the Autumn Statement.

How the flat rate VAT scheme currently works

The flat rate VAT scheme is a VAT scheme that can be used by small businesses and was introduced to simplify the VAT process by reducing the recording of sales and purchases in the VAT process. Any business with an expected turnover of up to £150,000 a year excluding VAT can apply to join the scheme.

VAT would be paid over to HMRC based on a percentage of the gross amount charged, with the percentage determined by the trade classification. Examples of some current flat rate percentages would be 14.5% for IT Consultancy and 14% for Management Consultancy.

The main benefit of the scheme other than simplifying the VAT process being that the business would pay over VAT to HMRC at a lower rate than has been charged, with the difference being treated as income. One of the drawbacks to the scheme is that the business can’t reclaim VAT on purchases, except for the purchase of capital items of over £2,000.

Proposed changes to the flat rate scheme

A flat rate percentage of 16.5% would be introduced for limited cost traders, regardless of their trade sector. A limited cost trader is described as one whose VAT inclusive expenditure on goods is either:

  • Less than 2% of their VAT inclusive turnover in a prescribed accounting period
  • Greater than 2% of their VAT inclusive turnover but less than £1,000 per annum if the prescribed accounting period is one year (if it is not one year, the figure is the relevant proportion of £1,000)

The following would not be described as good for this measure:

  • Capital expenditure
  • Food or drink for consumption by the flat rate business of employees
  • Vehicles, vehicle parts and fuel (except where the business carries out transport services)

How will this affect my business?

If your business would be considered a limited cost trader the benefit of using the scheme would be greatly reduced and in most cases the gain from using the scheme would be 0.2% of the net amount charged. For example a £10,000 charge for services provided would have VAT charged of £2,000 and VAT paid over to HMRC with a flat rate percentage of 16.5% would be £1,980. In this instance, if the business had more than £20 of VAT charged on expenses for that period, the company would be better off using the standard VAT scheme.