Are you a “limited cost trader”?
Flat rate VAT is rising to 16.5% from 1st April for businesses that HMRC designates as limited cost traders. This is defined as businesses that spend less than 2% of their sales on goods (not including capital goods, food and drink, and vehicles) for a given VAT accounting period. You will also be classed as a limited cost trader if you spends under £1,000 per year on goods even if that is more than 2 per cent of your total turnover. If you aren’t sure whether you are a limited cost trader then HMRC has provided a handy calculator tool on its website.
If your expenditiure on goods is greater than these limits then you will continue paying at your current flat tax rate.
The change is designed to stop businesses manipulating their accounts to qualify for the benefits that accrue from the flat rate scheme. It’s also a response to the rise in the numbers of self-employed and “labour only” businesses, which was highlighted as a cause in declining tax revenues.
The impact of the changes will vary according to which rate of VAT flat rate your are currently using. For service providers such as IT Consultants, Bookkeepers and Care Providers the increase will be around 2%. For some categories such as farmng, sport or recreation, and photography, however, the increase could be as much as 10%.
For some businesses on the cusp of the spending and turnover limits it may be advantageous to switch to standard VAT accounting. That has the benefit of allowing you to reclaim VAT on expenses, although it also means completing and filing a VAT return every 3 months.
Lewis Smith & Co. is here to help you make any VAT decisions and to sort out the admin if you need it.
Lewis Smith & Co. – Accountants for businesses in Kingswinford.