VAT Flat Rate Scheme - March 2017 Update to HMRC Notice 733

Below are the updated sections of HMRC notice 733 relating to the changes to the flat rate vat scheme that are coming in on 1st April 2017. These give more details with regard to how the changes are to be implemented.

4.4 Limited cost businesses

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%. There’s a simple calculator available to help businesses work out whether they’re a limited cost business – if you want to use the calculator, see the VAT Flat Rate Scheme - How much you pay page

Before you start you’ll need some basic information – use the information that relates to your most recent VAT return period. If you submit quarterly returns this will cover a 3 month period. If you submit annual returns this will cover a full year. You’ll need to know:

•    your relevant turnover – this is explained in section 6
•    the cost of goods – goods must be used exclusively for the purpose of your business and certain goods are excluded from this test, this is explained in section 4.6
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 £1000 per year

If your return is less than one year the figure is the relevant proportion of £1000. 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.

Example 1

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

This is more than 2% of the flat rate turnover and more than £250 so the rate they need to use is the sector rate for their business.

Example 2

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 2% of the flat rate turnover so the rate they need to use is 16.5%.

Example 3

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

This is more than 2% of the flat rate turnover but less than £250 so the rate they need to use is 16.5%.

4.5 VAT returns that covers both before and after 1 April 2017

The low cost business rate doesn’t come into force until 1 April 2017. You must split the return into 2 periods with the second period starting 1 April 2017. The test shouldn’t be done for the period before 1 April 2017. The calculation for the second period shouldn’t include any turnover or supplies from the first period.

  • If a quarterly return ends 30 April 2017 the portion of £1,000 that falls in the second period is £83.
  • If a quarterly return ends 31 May 2017 the portion of £1,000 that falls in the second period is £166.

Example 1

A business with a quarterly return ending 31 May 2017 has a turnover of £9,000 and relevant goods of £300. The return is split into 2 periods. No test is done for the first period. In the second period the turnover used is the amount received in the final 2 months, £6,000. The relevant goods figure is £200, the amount spent in the last 2 months.
This is more than 2% of the flat rate turnover and more than £166 so the rate they need to use is the sector rate for their business.

Example 2

A business with a quarterly return ending 30 April 2017 has a turnover of £9,000 and relevant goods of £240. The return is split into 2 periods. No test is done for the first period. In the second period the turnover used is the amount received in the final month, £3,000. The relevant goods figure is £80, the amount spent in the last month.
This is more than 2% of the flat rate turnover but less than £83 so the rate they need to use is 16.5%. This rate only applies to the turnover in the second period. The rate they need to use in the first period is the sector rate for their business.

4.6 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 goods if:
•    your own goods are transferred from another member state
•    they’re transferred under an agreement where title will pass at a later time, such as a hire-purchase 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 (see VAT Notice 701/19: fuel and power and VAT Notice 701/16: water and sewerage 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, see paragraph 15.1
•    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 see paragraph 15.1
•    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