From 1 April 2017, a new 16.5% rate will be introduced for businesses which are deemed to be a limited cost trader. This impacts many one person businesses that provide services, such as contractors and freelancers.
A limited cost trader is a business where the VAT inclusive expenditure on goods is either:
• less than 2% of the VAT inclusive turnover in 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
Goods, for the purposes of this measure, must be used exclusively for the purpose of the business but exclude the following items:
• Capital expenditure
• Food or drink for consumption by the flat rate business or its employees
• Vehicles, vehicle parts and fuel (except where the business is involved I transport services e.g. a taxi.
At the moment, it’s possible to make money out of being VAT registered and using the Flat Rate VAT Scheme because the flat rate can be as low as 12%.
We recommend an immediate review of the VAT and the options include de-registering for VAT if turnover is below the threshold or coming out of the scheme from 1st April 2017 and using the standard accounting scheme.
Warning. Do not try invoicing early to avoid the changes: an invoice issued in advance for services to be provided on or after 1 April 2017 will be treated as if the invoice was issued on 1 April 2017.
Image from Flickr by MARC.