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VAT Flat Rate Changes - Limited Cost Trader

It was announced at the Autumn Statement 2016 that a new 16.5% rate will apply from 1 April 2017 for businesses who have applied to use the VAT flat rate basis and who have limited costs, such as many labour-only businesses, using the Flat Rate Scheme. Businesses using the scheme, or considering joining the scheme, will need to decide if they are a 'limited cost trader'.

A limited cost trader will be defined as one whose VAT inclusive expenditure on goods is either:

  • less than 2% of their VAT inclusive turnover in a prescribed accounting period;
  • greater than 2% of their VAT inclusive turnover, but less than £1,000 per annum if the prescribed accounting period is one year (if it is not one year, the figure is the relevant proportion of £1,000).

There will be exclusions from the calculation to prevent attempts to inflate costs above 2%.

A business will need to check its actual spending on goods each quarter to identify if it meets the criteria to use the industry flat rate percentage or the 16.5% limited cost trader.

Goods, for the purposes of this measure, must be used exclusively for the purpose of the business, but exclude the following items:

  • capital expenditure;
  • food or drink for consumption by the flat rate business or its employees;
  • vehicles, vehicle parts and fuel (except where the business is one that carries out transport services - for example, a taxi business - and uses its own or a leased vehicle to carry out those services).

These exclusions are part of the test to prevent traders buying either low value everyday items or one-off purchases in order to inflate their costs beyond 2%.

The government has issued anti-forestalling legislation to provisions which are designed to prevent any business defined as a limited cost trader from continuing to use a lower flat rate beyond 1 April 2017. These provisions will affect a business that supplies a service on or after 1 April 2017, but either issues an invoice or receives a payment for that supply before 1 April 2017.