Tax & admin · 1 March 2017

HMRC issues criteria for limited cost traders in Flat Rate Scheme

Tax gap
The fixed VAT rate in the Flat Rate Scheme is set to rise to 16.5 per cent in April 2017

HMRC has issued new guidance for sole traders and micro business owners ahead of the increase to the fixed VAT rate in the flat rate scheme, outlining the criteria of “limited cost traders”.

The revised guidelines provide small business owners with the eligibility criteria of the higher fixed rate of 16.5 per cent.

The Flat Rate Scheme allows owners to apply a fixed flat rate percentage to annual turnover ahead of the VAT bill, simplifying the administrative strain of sales and purchases records into one calculation. The scheme is designed to support small businesses that spend little on goods, for example those in the services sector not relying on raw materials.

The fixed rate in the Flat Rate Scheme is set to increase to 16.5 per cent on 1 April 2017, a two per cent rise announced by chancellor Philip Hammond in last November’s Autumn Statement.

In the updated guidance HMRC defines limited cost traders as:

  • Those with VAT on goods of less than two per cent of VAT on annual turnover
  • Those with VAT on goods of greater than two per cent of VAT, but under £2,000 per year

Limited cost traders test

To clarify the eligibility criteria for a limited cost traders, HMRC provided three examples in the updated guidelines.

Example one

A business has a flat rate turnover of £10,000 a quarter. It spends £260 on relevant goods.

This is more than two per cent of the flat rate turnover and more than £250 so the rate it needs to use is the sector rate for the business.

Example two

A business has a flat rate turnover of £20,000 a quarter. It spends £325 on relevant goods.

This is more than £250 but less than two per cent of the flat rate turnover so the rate it needs to use is 16.5 per cent.

Example three

A business has a flat rate turnover of £10,000 a quarter. It spends £225 on relevant goods.

This is more than two per cent of the flat rate turnover but less than £250 so the rate it needs to use is 16.5 per cent.

An online calculator has also been made available for micro business owners and sole traders.

HMRC has stated that revisions for individual sector rates will arrive once the Flat Rate Scheme is introduced in April.

Are you a sole trader preparing for VAT changes? Don’t miss these important announcements:

Sign up to our newsletter to get the latest from Business Advice.


 
TAGS:

ABOUT THE EXPERT

Simon Caldwell is a reporter for Business Advice. He has a BA in politics and communications from the University of Liverpool, and previously worked as a content editor in the ecommerce industry.

Q&A

If you’ve found the article above useful, but have a more detailed and bespoke question, then please feel free to submit a query to our expert. We at Business Advice will get in contact with them on your behalf and arrange for a personalised response. These questions and answers will then be collated on the site for any other readers who have similar queries.

Ask a question

On the up

Find out how KPMG Small Business Accounting can really work for you

FIND OUT MORE