Warning about the new limited trader rate
HMRC has started writing to all those currently using the flat rate scheme (FRS) due to the introduction of the new 16.5% VAT flat rate applicable to businesses with limited costs, such as labour-only businesses.
A limited 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; or
- greater than 2% of their VAT inclusive turnover but less than £1,000 p.a if the prescribed accounting period is one year (if it is not one year, the figure is the relevant proportion of £1,000; for a quarterly return this is £250)
Those traders who are limited cost businesses must use the flat rate of 16.5%. For some businesses this will be clear but for other businesses, particularly those whose goods are close to 2%, they may need to complete this test each time they complete their VAT return. This is because it is possible to move from a limited cost rate of 16.5% in one period to the businesses relevant sector rate in another. This would happen if a business’s costs fluctuate above and below 2%.
HMRC has produced a simple calculator to help businesses work out whether they are a limited trader
Goods, for the purposes of this measure, must be used exclusively for the purpose of the business, with no private use (relevant goods), 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 for transport services businesses)
- goods for resale, leasing, letting or hiring out if your main business activity doesn’t ordinarily consist of selling, leasing, letting or hiring out such goods
- goods that you intend to re-sell or hire out, unless selling or hiring is your main business activity
- goods for disposal such as promotional items, gifts or donations
- any services, e.g accountancy, advertising, rent, anything provided electronically, bespoke software, and stamps and other postage costs
Examples of goods that do qualify as ‘relevant goods’ include:
- stationery and other office supplies to be used exclusively for the business
- gas and electricity used exclusively for the business
- standard software provided on a disk
- goods provided by a sub-contractor and itemised separately
- goods bought without VAT being charged provided they are not excluded goods
VAT returns straddling 1st April 2017
As the limited trader rate came into force on 1st April 2017, for VAT return periods that straddle that date, it will be necessary to split the return into two periods, with the second period starting 1st April 2017. The test, however, should not be done before 1st April 2017.
The calculation for the second period shouldn’t include any turnover or supplies from the first period.
If a quarterly return ends 30th April 2017, the portion of £1,000 that falls in the second period is £83.
If a quarterly return ends 31st May 2017, the portion of £1,000 that falls in the second period is £166.
A business with a quarterly return ending 31st May 2017 has a turnover of £22,500 and relevant goods of £500. The return is split into two periods. No test is done for the first period. In the second period the turnover used is the amount received in the final two months, £15,000. The relevant goods figure is £333, the amount spent in the last two months.
This is more than 2% of the flat rate turnover and more than £166, so the rate they need to use is the sector rate for their business.
A business with a quarterly return ending 30th April 2017 has a turnover of 9,000 and relevant goods of £240. The return is split into two periods. No test is done for the first period. In the second period the turnover used is the amount received in the final month, £3,000. The relevant goods figure is £80, the amount spent in the last month.
This is more than 2% of the flat rate turnover but less than £83 so the rate they need to use is 16.5%. This rate only applies to the turnover in the second period. The rate they need to use in the first period is the sector rate for their business.
HMRC’s letter refers the trader to the recently updated VAT Notice 733. What the letter neglects to do, however, is to advise the taxpayer to discuss their VAT status with their professional adviser which would be the most prudent thing to do.
PSCs whose main business is the provision of services are unlikely to meet the 2% goods test, so may want to stop using the FRS. In this case, the business must notify HMRC in writing as it cannot be done online (see 12.1 of VAT Notice 733).
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