Changes to flat rate VAT

Normally the VAT amount a business pays is calculated by deducting the VAT incurred on what they buy from the VAT they charge on what they sell. Small businesses have the option to use the flat rate VAT scheme. The VAT paid is a percentage of the gross sales value. The VAT percentage depends on the type of business and is intended to give a VAT payment much the same as that expected to be paid by an average business in that category.

However HMRC has identified that this option is being abused by some businesses who have limited costs. A new 16.5% VAT flat rate will apply from 1 April 2017 to businesses whose VAT inclusive expenditure is less than 2% of their VAT inclusive sales or less than £1,000 pa. This may affect labour-only contractors who have low overheads.

Users of the VAT flat rate scheme have until April to assess whether they will be affected by the new legislation. HMRC has said that they will provide an online tool to help determine whether they should use the new rate.