A very important change to VAT rulings were announced in the Autumn Statement, though it seems a great deal of media sources have skipped over this announcement. Despite being overshadowed by other announcements, this is something you really ought to be aware of if these new rulings are to affect you.
In the recent Autumn statement by the Chancellor of the Exchequer, Philip Hammond, some very severe restrictions on the use of the VAT accounting flat rate scheme were revealed.
Taking effect from 1st April 2017, the government will introduce a mandatory rate of 16.5% VAT for businesses collectively grouped as ‘limited cost traders’. A limited cost trader is defined as one that spends less than 2% of its sales on goods (not services) in an accounting period.
When working out the amount spent on goods, it cannot include purchases of:
- Capital goods (such as new equipment used in a business)
- Food and drink (such as lunches for staff)
- Vehicles or parts for vehicles (unless running a vehicle hiring business)
A business will also be defined as a limited cost trader if it spends less than £1,000 a year, even if this is more than 2% of the businesses turnover on goods.
As a result, many businesses will have to relinquish the lower flat rate percentage originally adopted, and thus these restrictions will make the scheme less economically attractive for many.
If you are affected by these proposed changes, call our VAT consultant David Fiddy to discuss the implications and alternatives that are available to you.