Changes to the flat rate VAT scheme – introducing ‘limited cost traders’

You may have seen that from 1st April there are changes being made to the flat rate VAT scheme, introducing the concept of ‘limited cost traders’.

A new flat rate of 16.5% is being introduced and will be applied to any business that meets the criteria of a limited cost trader.

Generally speaking, if your total VAT inclusive expenditure on goods (not services) is less than 2% of your total VAT inclusive sales, then you will pay VAT over at 16.5% as a limited cost trader, not your usual % rate.

There are specific exclusions from what can be included under the goods expenditure total – capital purchases, food and drink, vehicle costs, etc – so a separate calculation needs to be made for you to work out which rate applies.

The test is applied to each VAT period, so some quarters you could be at 16.5%, others quarters on your regular % rate.

Up until now it has only been important to have your sales reconciled at the end of a period from a VAT point of view, but going forward it will be as equally important to have your purchases fully reconciled as these form part of the % calculation.

Because of these changes we are expecting that it may be beneficial for many on the flat rate scheme to move to the normal VAT scheme to avoid paying more than necessary.

If your VAT quarter end straddles 1st  April you will have to do an extra calculation, accounting for everything pre 1st April the old way, and everything post then under the new system, meaning you may well pay at an usual overall percentage for that quarter.  From the next period on the whole period will be under the new system.

Its likely to get complicated which is why online tools like Xero are an excellent way of simplifying these calculations and reducing any nasty surprises that you might have. If in doubt – speak to your accountant!

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