VAT Flat Rate Changes – Implications for Low-Cost Traders

VAT Flat Rate Changes – Implications for Low – Cost Traders

April 2017 saw changes which mean that small limited companies who have low annual costs face a higher VAT liability if they are using the flat rate scheme (FRS).

Unlike the standard VAT scheme, the FRS makes calculations simpler for users. VAT liability would be calculated by applying a fixed percentage to the turnover of a company. The percentage differs dependent on the trade of the company.

For example:

Client invoice = £1000 + 2-% VAT

You owe HMRC 14.5% x £1200 = £174


Those using the FRS are restricted on VAT reclaims. As of April 2017, limited-cost traders use a new 16.5% rate when calculating their FRS liabilities.

What is a limited-cost trader?

Limited-cost traders are classed as businesses which have a VAT-inclusive expenditure on relevant goods of either:

  • Less than 2% of their VAT inclusive turnover in a designated accounting period
  • More than 2% of their VAT inclusive turnover but less than £1000 per annum if the accounting period is 1 year.


Relevant goods now exclude items such as:

  • Rental costs for offices
  • Electronically downloaded services
  • Costs for advertising
  • Contractor accountancy fees
  • Downloaded or bespoke software.


You can see whether you are a ‘low-cost trader’ on the governments calculator.


Should you leave the Flat Rate Scheme?

  • The Flat Rate Scheme is designed to make calculating VAT easier and this may be your fundamental reason for using it. If you incur few business charges this could be sensible for you.
  • Within your first year after registering for VAT, your company will still qualify for a deduction of 1% on the flat 16.5% rate. So even joining just for the first year is beneficial. Based on your accounts, your accountant can tell you which scheme will work best for you.


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