As you may be aware HMRC decided to curb on businesses who use the Flat Rate Scheme and introduced “Limited cost businesses” from 1 April 2017
If you’re a limited cost business, you should use the flat rate of 16.5%. There’s a simple calculator available to help businesses work out whether they’re a limited cost business – follow this link
Before you start you’ll need some basic information – use the information that relates to your most recent VAT return period. If you submit quarterly returns this will cover a 3 month period. If you submit annual returns this will cover a full year. You’ll need to know:
- your turnover
- the cost of goods – goods must be used exclusively for the purpose of your business and certain goods are excluded from this test, this is explained below
Relevant goods
You receive a supply of goods (including by acquisition or import) if the exclusive ownership of moveable items is passed to you from another person.
You also receive a supply goods if:
- your own goods are transferred from another member state
- they’re transferred under an agreement where title will pass at a later time, such as a hire-purchase agreement
- receive water or any form of power, heat, refrigeration or ventilation but not if you hire in equipment which does this – that’s a supply of services
Relevant goods are goods that are used exclusively for the purposes of your business, but don’t include:
- vehicle costs including fuel, unless you’re operating in the transport sector using your own, or a leased vehicle
- food or drink for you or your staff
- capital expenditure goods of any value
- goods for resale, leasing, letting or hiring out if your main business activity doesn’t ordinarily consist of selling, leasing, letting or hiring out such goods
- goods that you intend to re-sell or hire out, unless selling or hiring is your main business activity
- any services
Examples of relevant goods
This isn’t an exhaustive list:
- stationery and other office supplies to be used exclusively for the business
- gas and electricity used exclusively for your business
- fuel for a taxi owned by a taxi firm
- stock for a shop
- cleaning products to be used exclusively for the business
- hair products to use to provide hairdressing services
- standard software, provided on a disk
Examples of supplies that aren’t relevant goods
This isn’t an exhaustive list:
- accountancy fees, these are services
- advertising costs, these are services
- an item leased/hired to your business, this counts as services, as ownership will never transfer to your business
- food and drink for you or your staff, these are excluded goods
- fuel for a car this is excluded unless operating in the transport sector using your own, or a leased vehicle
- laptop or mobile phone for use by the business, this is excluded as it is capital expenditure
- anything provided electronically, for example a downloaded magazine, these are services
- rent, this is a service
- software you download, this is a service
software designed specifically for you (bespoke software), this is a service even if it is not supplied electronically
You’re a limited cost business if the amount you spend on relevant goods including VAT is either:
- less than 2% of your VAT flat rate turnover
- greater than 2% of your VAT flat rate turnover but less than £1000 per year
If your return is less than one year the figure is the relevant proportion of £1000. For a quarterly return this is £250.
For some businesses this will be clear, other businesses – particularly those whose goods are close to 2% – may need to complete this test each time they complete their VAT return. This is because you can move from a limited cost rate of 16.5% in one period to your relevant sector rate in another. This would happen if your costs fluctuate above and below 2%.
If you’re a limited cost trader this means that you may pay more VAT than you do on standard accounting – you may want to check to make sure the Flat Rate Scheme is still right for you.
Example 1
A business has a flat rate turnover of £10,000 a quarter. It spends £260 on relevant goods.
This is more than 2% of the flat rate turnover and more than £250 so the rate they need to use is the sector rate for their business.
Example 2
A business has a flat rate turnover of £20,000 a quarter. It spends £325 on relevant goods.
This is more than £250 but less than 2% of the flat rate turnover so the rate they need to use is 16.5%.
Example 3
A business has a flat rate turnover of £10,000 a quarter. It spends £225 on relevant goods.
This is more than 2% of the flat rate turnover but less than £250 so the rate they need to use is 16.5%.
POSSIBLE SOLUTIONS
- Remain as is (suitable for businesses with small base cost)
- De-register from the scheme and move to normal accounting scheme (advantage to claim input VAT especially from supplies that aren’t relevant goods for “limited Cost Traders”)
- De-register from the scheme and move to normal annual accounting scheme (saving you time to deal with this once a year)
The above guidance is Per VAT Notice 733:Flat Rate Scheme for small businesses
Correct as of 22 March 2017