At Autumn Statement on 23 November 2016, the Chancellor of the Exchequer announced the introduction of a new 16.5% VAT flat rate for businesses with limited costs.

The existing VAT flat rate scheme (FRS) is effectively a simplified accounting scheme for businesses who have a turnover below £150,000 per year (excluding VAT). Currently, if eligible, a business can opt into a flat rate scheme and the flat rate percentage they use is determined by reference to their trade sector.

The proposed changes will impact from April 2017, with businesses determining if they meet the definition of a limited cost trader. Inevitably those businesses affected by this scheme will need to apply a new, higher flat rate percentage.

HMRC defines a limited cost trader (LCT) as follows.

An LCT will be defined as one whose VAT inclusive expenditure on goods is either:

• Less than 2% of their VAT inclusive turnover within a prescribed accounting period.
• Greater than 2% of their VAT inclusive turnover but less than £1,000 per annum if the prescribed accounting period is one year (if it is not one year, the figure is the relevant proportion of £1,000.

Draft secondary legislation will be published shortly, after which businesses will have 8 weeks to comment.

For more information visit:

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