The new flat-rate VAT: what you need to know

The new flat-rate VAT: what you need to know

From 1st April, 2017, a VAT flat rate of 16.5% will apply to limited cost traders. As a result, the VAT owed by affected businesses will rise from this date.

Businesses affected will continue to charge customers 20% VAT.

How will the new scheme work?

VAT paid to Her Majesty’s Revenue & Customs (HMRC) is usually the difference between the amount businesses pay on their purchases and the amount they charge customers. Under the new regulations, businesses will pay the flat rate to HMRC and keep the difference.

The percentage applied will depend on the type of business, but is expected to result in businesses paying the same amount under the old regime.

The new law will apply only to limited cost traders. That means businesses which spend less than 2% of their sales (or less than £1,000 in total) on goods.

In this case, goods will NOT include costs for services. They will also not include payments for capital items, food and drink and car-related costs such as fuel or repairs. (Except for businesses providing transport services, such as taxi firms.)

New avoidance rules have been set up to stop businesses classed as limited cost traders using the lower flat rate beyond 1st April, 2017. These avoidance rules will affect any company that supplies a service before the cut-off date but issues an invoice (or receives payment) after it.

Who will the regulation affect the most?

Many sectors are likely to be affected by the change. Serviced-based companies not relying on goods will include hairdressers and beauticians, consultants, solicitors, cleaners and even labour-only construction firms (CIS).

In order to help those unsure if the change will affect them, HMRC has produced an online tool which will require you to input information relating to your business’ most recent tax return. For companies submitting quarterly returns, this will be the most recent 3 months. For companies submitting yearly returns, this will be the full year’s worth.

What do you need to do?

If you’re unsure how to handle the new flat-rate VAT legislation, then give us a call. At SQK Accountancy, we provide specialist VAT advice to small businesses across the UK. Get in touch today and put your mind at ease.

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