Impact of 16.5% VAT Flat Rate Scheme on Contractors

HOW THE INTRODUCTION OF THE NEW 16.5% VAT FLAT RATE COULD AFFECT CONTRACTORS FROM APRIL 2017?

Effective from 1 April 2017, The VAT flat rate scheme (FRS) for businesses with limited cost will increase to 16.5% from their current rate, based on defined criteria for a ‘limited cost trader.’

So what is a Limited Cost Trader?

According to HMRC guidance, a limited cost trader will be defined as one whose VAT inclusive expenditure on goods are 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 £1000 per annum if the prescribed accounting period is one year (if it is not one year, the figure is the relevant proportion of £1000)

Goods, are business expense 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)

Many contractors will fall into the “limited cost trader” category, as they probably do not have much expenditure as goods. For example if your company’s turnover is £100,000 excluding VAT, you are paying back 14.5% VAT, your net benefit of using the current flat rate scheme is £2,600. With the new 16.5% flat rate, you will pay back 16.5% VAT, your net benefit from April 2017 will be £200. Therefore you will lose £2,400.

The impact on your turnover is £2,400.