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Changes to flat rate VAT - A warning

What is changing?


In the Autumn Statement, it was announced that from 1 April 2017 there would be changes which affect businesses which have a very low cost base termed "limited cost traders".

The VAT flat rate for these limited cost traders was announced at 16.5%. So if you invoice work for 1,200 including VAT of 200 you would pay 198 to HMRC in respect of flat rate VAT.


What is a limited cost trader?


A limited cost trader was defined as one that spends less than 2% of its sales on goods (not services) in an accounting period. A firm will also be a limited cost trader if it spends less than 1,000 a year, even if this is more than 2% of the firm's turnover on goods.


It was noted that the following cannot be included as purchases (goods):


  • capital goods (such as new equipment used in a business)

  • food and drink (such as lunches for staff)

  • vehicles or parts for vehicles (unless running a vehicle hiring business)


    Who will this affect?


    The legislation is aimed at labour-intensive businesses where very little is spent on goods. For example, IT contractors, consultants, hairdressers and construction workers who supply labour only (all materials paid for by main contractor).


    What should I do?


    At the moment there is uncertainty as to what constitutes goods as the draft legislation is not released until 5 December 2016. So there is no action required from you at the moment. Here at robinson+co we are keeping a close eye on developments over the coming weeks to ensure all our clients are advised how this affects them promptly and accurately when more is known.

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