Flat Rate VAT Change Explained


Flat Rate VAT Changes Explained

Possibly the most important change the Chancellor announced in the Autumn Statement are changes to the VAT Flat Rate scheme. So, what does this mean for you as a Freelancer?

The change will affect business which spend very little on the purchase of goods e.g. stationery and repairs and renewals. The Chancellor has named these businesses ‘Limited Cost Traders’, reflecting the nature of their purchases.

A Limited Cost Trader is a trader that spends less than 2% of its sales on goods (not services) in an accounting period. A company would also be categorised as a Limited Cost Trader if it spends less than £1,000 a year, even if this is more than the 2% of turnover on goods.

What is classed as goods?

Here are some examples:

  • Promotional materials e.g. T-shirts, badges
  • Exhibition banners
  • Business cards
  • Printed media
  • Stationery
  • Light bulbs
  • Batteries
  • Office clock
  • Office cables
  • Repairs and renewals*

*HMRC will continue to accept replacing a computer as ‘Repairs and Renewals’ in your company accounts but when lookin at traders using the Flat Rate Scheme for VAT, they will not allow items such as replacement computers, tablets, laptops, printers or mobile phones as part of the £1,000 minimum expenditure needed to qualify for the scheme.

What isn’t classed as goods?

  • Capital items (such as new equipment used in the business)
  • Vehicles, or vehicle parts (unless running a vehicle hiring business)
  • Food and drink
  • Mileage
  • Mobile, broadband and landline phone bills and all services
  • Labour and subcontractors
  • Pensions, wages and salaries.

When does it start?

The new rules start from April 1st 2017.

What’s the Bottom line?

If you are over the threshold for VAT registration, you can switch to the cash accounting scheme. If you are on the flat rate scheme and spend less than £85 per month or £1,000 per year on goods, or less than 2% of your sales then you may wish to de-register for VAT. Alternatively, you can voluntarily join the Cash Accounting VAT scheme if this would prove financially beneficial. Please contact us to discuss the best option for you. For full details on how the flat rate scheme works, see our FRS explained post.

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