Philip Hammond, the UK Chancellor of the Exchequer, has used the Autumn Statement to communicate proposed changes to the VAT Flat Rate Scheme which are designed to combat tax avoidance.
Depending on the business sector that a company belongs in, the Flat Rate Scheme allows small-to-medium sized businesses to apply a reduced, fixed-rate percentage to calculate the VAT due on their supplies – this will be less than the standard 20%. To mitigate for this, companies operating under the scheme are limited in the amount of input tax that they are able to reclaim.
The proposed changes are designed to target ‘limited cost traders’, defined by HMRC as traders whose VAT inclusive expenditure on goods (excluding capital expenditure, food/drink, vehicles) in a prescribed accounting period is “less than 2% of their VAT inclusive turnover in a prescribed accounting period”, or “greater than 2% of their VAT inclusive turnover but less than £1000 per annum if the prescribed accounting period is one year (if it is not one year, the figure is the relevant proportion of £1000)”.
A flat-rate of 16.5% has been introduced for these traders and will apply to companies who fall within the definition of a low cost trader, overriding the previous flat-rate percentage that was applicable under the reference by sector approach. Labour-intensive businesses who operate with a low cost base are expected to be the most impacted by the proposed changes to the Flat Rate Scheme which is set to come into effect on 1st April 2017.