From 1 April 2017, many users of the VAT Flat Rate Scheme will be designated as “Limited Cost Traders” (“LCTs”).
Those businesses affected by the Limited Cost Trader Flat Rate Scheme rules will be required to use a relevant percentage of 16.5% of their gross turnover to account to HMRC for VAT under the Flat Rate Scheme, irrespective of what trade sector was previously being used.
For example, a management consultant has previously used a relevant percentage of 14%, meaning that when they invoice a client for £1,000+VAT of £200, they pay over (14% x £1,200) £168. If they are treated as an LCT, this will now rise to (£1,200 x 16.5%) £198. This means that the notional input tax has decreased from £32 pounds to just £2 for every £1,000 of VAT exclusive sales.
The Value Added Tax (Amendment) Regulations 2017 brought these rules into force on 1 April 2017.
For VAT periods spanning 1st April 2017, it is necessary to apportion income between the part periods either side of 1st April 2017. See section 4.4 of VAT notice 733 https://www.gov.uk/government/publications/vat-notice-733-flat-rate-scheme-for-small-businesses/vat-notice-733-flat-rate-scheme-for-small-businesses#section4.
Businesses are classed as LCTs if their purchases of goods (not services) in the VAT accounting period are less than the greater of:
- 2% of relevant turnover for that period.
- £1,000 if the VAT accounting period is one year.
For the purpose of determining whether a business is an LCT the following expenditure must be excluded from “goods”:
- Capital expenditure
- Food and drink consumed by the flat-rate trader or employees of the flat-rate trader
- Vehicles, parts and fuel (unless the trader uses the flat rate percentage for “Transport or storage, including couriers, freight, removals and taxis” and owns or leases a vehicle for that business)
- Goods for the purpose of resale, leasing, letting or hiring out except where the main business activity of the flat-rate trader ordinarily consists of selling, leasing, letting or hiring out such goods
- Goods for disposal as promotional items, gifts or donations
The final two bullet points above were not included in the draft legislation. Indeed, these unexpected exclusions from “goods” will be unwelcome news to those who previously thought they would be able to avoid being classed as LTCs by virtue of them buying and selling goods as a secondary or ancillary part of their business.
HMRC have now updated their public notice, VAT Notice 733: Flat Rate Scheme for small businesses and have introduced an online tool to work out flat rate percentage.
If you are currently using the Flat Rate Scheme for VAT and are unsure whether you will be treated as a Limited Cost Trader, or how this may affect you, please get in touch with usual contact at CRM.
This article is written based on the legislation and guidance in force in April 2017. Professional advice should be taken before taking any action.
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