HMRC issues criteria for limited cost traders in Flat Rate Scheme
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.
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.
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.
A business has a flat rate turnover of 10, 000 a quarter. It spends 225 on relevant goods.
Praseeda Nair is the editorial director of Business Advice, and its sister publication for growing businesses, Real Business. She's an impassioned advocate for women in leadership, and likes to profile business owners, advisors and experts in the field of entrepreneurship and management.
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