The flat rate scheme has been a lucrative method for increasing the profits of many businesses, especially contractors. The scheme works by allowing businesses with turnovers below £150,000 to charge VAT and then pay over a percentage of the VAT to HMRC. This reduces the administrative burden of preparing full VAT returns and allows the business to make a small profit on the VAT.

From 1 April 17 HMRC have introduced a new rule for businesses on the flat rate scheme. This rule states that if a business’s cost of relevant goods is less than 2% of the VAT flat rate turnover, or if the costs are less than £1,000 per year (£250 per quarter) then these businesses are deemed to be limited cost businesses. Limited cost businesses are no longer allowed to use their normal sector percentage rate but instead have to use the flat rate of 16.5%. This can be a rise of up to 10%.

It is important to be aware that one VAT quarter your business could be deemed a limited cost business, but the next VAT quarter your business may not fall foul of the legislation and thus may not be deemed a limited cost business. This means for businesses whose costs vary or who are close to the 2% will need to check which percentage to use every time they prepare a VAT return – an administrative nightmare!!!!

What are relevant goods?

Relevant goods must be exclusively used for the purpose of the business. They do not include items such as fuel (unless the business operates in the transport sector), food or drink for staff, any capital expenditure, any service or goods for resale, leasing, letting or hiring out unless your principal activity is that or reselling, leasing, letting or hiring out goods.

HMRC states that relevant goods include stationery, gas and electricity used exclusively for your own business, stock for a shop, cleaning products and software provided on a disk.

Is the Flat Rate Scheme still Right for my Business?

HMRC state that all businesses on the flat rate scheme will need to review whether this is the correct scheme for their circumstances. At Re:Accounts we can review your VAT position and how any changes due to the flat scheme may affect your business. Please contact us if we can be of any assistance to you.