07.12.16 Flat Rate Vat: ‘Limited Cost Trader’ Draft Legislation

In the Autumn Statement, on 23^rd November 2016, the Chancellor of the Exchequer announced that a new rate of 16.5% for businesses using the Flat Rate VAT Scheme (‘FRS’) would be introduced if they have ‘limited costs’: such businesses are to be defined as ‘limited cost traders’.

On the 5^th December 2016, Government released draft legislation “The Value Added Tax (Amendment) Regulations 2017” that amend the VAT Regulations 1995 to introduce the new 16.5% rate; updated the guidance “Tackling aggressive abuse of the VAT Flat Rate Scheme – technical note; and published the policy paper “VAT: tackling aggressive abuse of the Flat Rate Scheme”.

The new rate for limited cost traders is set to come into effect on 1^st April 2017.

Draft legislation

The draft legislation amends the VAT Regulations 1995 so that, where a business using the FRS is a limited cost trader, they will have to use the 16.5% rate, regardless of the business activity they are currently registered to under the FRS. A business is a limited cost trader if its expenditure on relevant goods in any prescribed accounting period, together with any VAT chargeable on that expenditure, is less than the specified amount.

Relevant goods are defined as goods used or to be used by the business exclusively for the purpose of the business but excluding —

• vehicles, vehicle parts and fuel except where the business activity that it is registered to under the FRS is in the Table is “Transport or storage, including couriers, freight, removals and taxis” and the business owns a vehicle for business use or holds a vehicle for business use under a lease;
• any food or beverages for consumption by the business or employees of the business;
• capital expenditure goods

The specified amount is defined as the higher of—

• 2 percent of the business’s relevant turnover in the prescribed accounting period; and
• where the prescribed accounting period is one year, £1000, and, in any other case, such proportion of £1000 as the length of the accounting period bears to the period of one year.

The draft legislation also confirms that a limited cost trader will still get the 1% reduction in their first year of being VAT registered.

Updated Guidance and Policy paper

The policy paper states that there will be 8 weeks to comment on the draft legislation. HMRC will be introducing a tool, so that businesses can determine whether they are a limited cost trader.

The guidance was updated on the 5^th December 2016, to include an “Examples” section. It includes HMRC’s views on goods and capital expenditure for the purpose of the definition of a limited cost trader:

“Goods must be used exclusively for the purpose of the business - this means that you must not include the cost of any goods that are used in full or in part for your own private use. For example, printer ink and stationery that are used for both your office and your home would not be included. It would also exclude goods acquired with the intention of giving them away or donating them to a third party.

Capital expenditure - is the cost of any goods which are bought to be used in the business over a period of time (for example, longer than a year). Examples include equipment such as a computer, mobile phone, office furniture, a tablet or a printer, even if they are not necessarily treated as capital assets for accounting purposes.”

It is worth noting that this is HMRC’s view and that legislation is open to interpretation, and that it is the courts who have the last say.

Anti-forestalling provisions will be implemented too, which will stop businesses from making an up-front payment to avoid the new percent; for example, paying for services before 1 April 2017 but not suppling them until after. Where a payment covers services supplied before and after 1 April 2017, the payment will have to be apportioned.

Aspire comment

This measure has been announced further to Government’s accusations that there is aggressive abuse of the FRS. Any business now using the FRS will, following 1 April 2017, have to consider whether they are a limited cost trader. It is clear that limited cost traders will be impacted financially, although they will remain to have administration benefits.

Government have announced they will create an online tool to aid business to decide if they are a limited cost trader, although its reliability and accuracy is questionable following their not so good track record of creating online tools – the Employment Status Indicator tool is a reminder of this.

If you have any questions regarding any aspects of the new FRS percentage, please get in contact on 0121 445 6178.