During his Autumn statement today the Chancellor announced that the government would be “Tackling aggressive abuse of the VAT flat rate scheme”.

In doing this he announced the introduction of a new 16.5% flat rate for businesses with limited costs. Typically this could be many contractors so understandably many are worried how this will affect them and the profit they receive annually from VAT flat rate scheme surplus. This change will be implemented from 1st April 2017 and businesses will have to decide whether they are a limited cost trader.

HMRC have defined a limited cost trader as one who has:

  • “Less than 2% of their VAT inclusive turnover in a prescribed accounting period
  • Greater than 2% of their VAT inclusive turnover but less than £10000 per annum if the prescribed accounting period is 1 year

Goods for the purpose 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 one that carries out transport services – for example a taxi business – and uses its own or a leased vehicle to carry out those services)

These exclusions are part of the test to prevent traders buying either low value everyday items or one off purchases in order to inflate their costs beyond 2%”

In real terms this means that a contractor who currently earns £100k per annum and is registered on the flat rate scheme at 14.5% will earn an extra £2600 per year in flat rate surplus. If this was to change to 16.5% then they will only have £200 profit in flat rate surplus per annum.

It will be interesting to see how this develops and how many contractors this will affect. I guess that a lot of contractors will simply swap to the standard VAT scheme as this will be more beneficial to them in the long run.