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January 16th 2017

VAT Flat Rate Scheme: end of the road for low cost traders

The changes, which are expected to come into effect from 1 April 2017, will see businesses that have relatively low running costs – “limited cost traders” in HMRC speak – paying over significantly more VAT than is required under current rules.

Importantly, all businesses who continue in the Flat Rate Scheme post 1 April will have to perform calculations each time they submit a VAT return, to determine whether they should declare at their normal trade rate, or at the “limited cost trader” rate of 16.5%

The big issue for low cost businesses is that, where the 16.5% rate applies, they effectively have to pay across to HMRC almost all of the sales VAT which they have billed to customers – rather than pocketing some of that VAT as allowed under current rules.

In other words, effective 1 April this year, the Government is removing from many traders one of the key advantages of using the Flat Rate Scheme. As is often the case, this is all being done under the banner of “tackling tax avoidance”. Quelle surprise - in reality this is just another measure designed to add cash to HM Treasury’s coffers.

Businesses who may be affected by the changes have a number of options:

  1. Remain registered under the Scheme and apply the new rules;
  2. Remain VAT registered but exit the Flat Rate Scheme; or
  3. (for those businesses under the deregistration limit) potentially de-register for VAT

I expect that many low cost trader businesses who are beneath the deregistration threshold will probably cancel their VAT registration as a result of the proposed changes.

As always, professional advice should be sought in all cases before taking further action.

More details here https://www.gov.uk/government/publications/tackling-aggressive-abuse-of-the-vat-flat-rate-scheme-technical-note/tackling-aggressive-abuse-of-the-vat-flat-rate-scheme-technical-note

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