The VAT Flat Rate scheme was introduced by HMRC to make life easy for small businesses with low outgoings. How typical of HMRC to now argue that using a scheme they introduced amounts to “aggressive tax abuse”! How typical of them too to complicate what was such a simple scheme.

Businesses using the scheme, or thinking of joining the scheme, will now need to decide whether they are a “limited cost trader”.  A limited cost 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 where the spend is more than 2% but will be less than £1,000 for the accounting year.

Goods, for the purposes of this measure, must be used exclusively for the purpose of the business but exclude capital expenditure, food or drink for own consumption and vehicles, vehicle parts and fuel. These exclusions are part of the test to prevent traders buying either low value everyday items or one off purchases in order to inflate their costs beyond 2%.

If businesses are a limited cost trader as from 1 April 2017 they must start using a flat VAT rate of 16.5%, rather than the lower rate of 12% or 14.5% they are probably using now. For some, the increase in VAT payable could be many thousands.

Many businesses will be able to avoid becoming limited cost traders just by making sure they buy sufficient goods. For example, say a typical VAT Flat Rate scheme business turns over £20,000 per quarter VAT-inclusive. All the business must do to avoid being caught as a limited cost trader is to buy goods of at least £400 per quarter.

Some experts have suggested a variety of strategies:

  • A sub-business activity of wheeling and dealing on eBay, perhaps collectibles or antiques?
  • Start selling accessories allied to your business activity e.g. hair care products for a hairdresser or accounting software for a bookkeeper.
  • Selling guides on “How to…this and that” e.g. business books for a management consultant.
  • Buy more software or technical books (making sure they’re physical rather than downloaded).
  • Group your purchases of goods into one or more quarters as the test needs to be applied every accounting period.

Whilst the last one could be open to question these strategies sure beat buying loads of unnecessary stationary or printer cartridges you’re not going to use and throwing them away or piling them up in the corner! Talk to us about your individual situation before the new rules kick-in.


Disclaimer: While every effort has been made to provide valuable, accurate information in the publications, their content is not intended to replace the advice that a professional would give, taking your particular circumstances into account. This firm, contractors and employees do not accept any responsibility or any form of liability for reliance upon or use of the contents of these articles.