URGENT – Limited Cost Traders Flat Rate Scheme

With effect from 1st April 2017 HMRC have introduced very significant changes to the flat rate scheme which will affect a large percentage of those who use it.

For those who use the scheme and supply mainly services, you are likely to find that you will be better to return to the standard scheme (which can be done at any time) and if you are trading under the VAT registration threshold may indeed choose to de-register. So you are aware of the changes, below is a guide to the new rules:

So what are limited cost traders?

If in a VAT return quarter, you purchase less than £250 (inclusive of VAT) of relevant goods or 2% of your VAT inclusive turnover, whichever is the higher, then you will be a low cost trader.

So what are relevant goods?

These are goods used exclusively for the main business (not any ancillary trade set up to avoid the new rules). They exclude: –

  • Vehicle Costs including fuel
  • Food and drink for staff
  • Capital goods of any value.
  • Leased items
  • Promotional goods
  • All services including rent, telephone and software (unless supplied on disk)

Items that are included: –

  • Office supplies
  • Gas and electricity
  • Goods for resale
  • Cleaning products
  • Items used to provide a service.

What happens if I am a limited cost trader?

You must use a flat rate of 16.5% for that quarter regardless of your normal flat rate percentage. This rate effectively allows you to recover approximately 0.167% of your VAT inclusive turnover. Typical recoveries would be £200 on an annual turnover of £120,000 (inc VAT) or £100 on a turnover of £60,000 including VAT.

It can be seen therefore that in most cases if you are over the registration threshold of £85,000 and “caught” by these rules then the VAT on such things as mobile phone costs, our fees and fuel costs will make the standard VAT scheme beneficial.

If your turnover is below £85,000 then you do, of course, have the option of de-registering if you think that the modest benefits of registration exceed the administrative headaches of quarterly returns!

How to change to the standard scheme

There is no formal form – you need to write to HMRC quoting your VAT registration number and effective date stating that you no longer wish to be in the Flat Rate Scheme. Then send your letter to:

HMRC, Imperial House, 77 Victoria Street, Grimsby DN31 1DB

How to de-register

If your VAT Exclusive turnover is under £83,000 PA,this can be done by submitting form VAT 7 (downloadable from the internet) or via your online VAT access.

Contact Us

Please do not hesitate to contact us if you want to chat through any aspect of this new scheme.

It is vital though that you review your own position as a matter of URGENCY