VAT Flat Rate Scheme – Limited Cost Traders
These changes take effect on 1 April 2017. You shouldn’t use the limited cost business rate before this date.
If you’re a limited cost business, you should use the flat rate of 16.5%. To determine whether you are a limited cost trader, you will need the following information:
- Your relevant turnover – explained further below.
- the cost of goods – goods must be used exclusively for the purpose of your business and certain goods are excluded from this test (explained further below).
You’re a limited cost business if the amount you spend on relevant goods including VAT is either:
- less than 2% of your VAT flat rate turnover
- greater than 2% of your VAT flat rate turnover but less than £1,000 per year
If your return is less than one year the figure is the relevant proportion of £1,000.
For a quarterly return this is £250. For some businesses this will be clear, other businesses – particularly those whose goods are close to 2% – may need to complete this test each time they complete their VAT return. This is because you can move from a limited cost rate of 16.5% in one period to your relevant sector rate in another. This would happen if your costs fluctuate above and below 2%.
If you’re a limited cost trader this means that you may pay more VAT than you do on standard accounting – you may want to check to make sure the Flat Rate Scheme is still right for you.
Relevant Goods
You receive a supply of goods (including by acquisition or import) if the exclusive ownership of moveable items is passed to you from another person. You also receive a supply of goods if:
- your own goods are transferred from another EC member state
- they’re transferred under an agreement where title will pass at a later time, such as a hirepurchase agreement
- receive water or any form of power, heat, refrigeration or ventilation, but not if you hire in equipment which does this – that’s a supply of services.
Relevant goods are goods that are used exclusively for the purposes of your business, but don’t include:
- vehicle costs including fuel, unless you’re operating in the transport sector using your own, or a leased vehicle
- food or drink for you or your staff
- capital expenditure goods of any value
- goods for resale, leasing, letting or hiring out if your main business activity doesn’t ordinarily consist of selling, leasing, letting or hiring out such goods
- goods that you intend to re-sell or hire out, unless selling or hiring is your main business activity any services
Examples of relevant goods – (This isn’t an exhaustive list.)
- stationery and other office supplies to be used exclusively for the business
- gas and electricity used exclusively for your business
- fuel for a taxi owned by a taxi firm
- stock for a shop
- cleaning products to be used exclusively for the business
- hair products to use to provide hairdressing services
- standard software, provided on a disk
Examples of supplies that aren’t relevant goods – (This isn’t an exhaustive list.)
- accountancy fees, these are services
- advertising costs, these are services
- an item leased/hired to your business, this counts as services, as ownership will never transfer to your business
- food and drink for you or your staff, these are excluded goods
- fuel for a car this is excluded unless operating in the transport sector using your own, or a leased vehicle
- laptop or mobile phone for use by the business, this is excluded as it is capital expenditure
- anything provided electronically, for example a downloaded magazine, these are services
- rent, this is a service
- software you download, this is a service
- software designed specifically for you (bespoke software), this is a service even if it is not supplied electronically
What must I include in my flat rate turnover?
Your flat rate turnover is all the supplies your business makes, including VAT. This means all of the following:
- the VAT inclusive sales and takings for standard rate, zero rate and reduced rate supplies
- the value of exempt income, such as any rent or lottery commission
- supplies of capital expenditure goods, unless they are supplies on which VAT has to be calculated outside the Flat Rate Scheme
- the value of any despatches to other Member States of the EC if you are making intra EC supplies.
Note: as exempt and zero rate supplies are included in your flat rate turnover you apply the flat rate percentage to the exempt and zero rate turnover. You may pay more VAT by being on the scheme if these supplies are a larger proportion of your business turnover than the average for your trade sector.
Please find below a link to the full article: https://www.gov.uk/government/publications/vat-notice-733-flat-rate-scheme-for-smallbusinesses/vat-notice-733-flat-rate-scheme-for-small-businesses#section8