Skip to Navigation

How will Flat Rate VAT change?

There has been number of changes in the current tax year and one of the key was changes to flat rate scheme.

How will Flat Rate VAT change?

From April 2017, the Government is introducing a new 16.5% Flat Rate VAT scheme that many ‘labour-only’ businesses, such as contractors, will have to move to. This will almost cease the benefits of Flat Rate VAT for many self-employed firms.


Due to the way the Flat Rate scheme rates are set (e.g. 14% for management consultants), if you’re caught by the new rules you’ll end up paying more VAT (so a management consultant would pay an extra 2.5% of VAT).

Who exactly will this apply to?

A definition has been created of ‘limited cost traders’ who count as ‘labour-only’ businesses that will have to use the 16.5% rate if they want to use the Flat Rate scheme.

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.

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.

Examples of relevant goods

Services of any sort cannot be included in the calculation; some goods item have been purposely left out which we have mentioned below. Some examples of good are below

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
  • standard software, provided on a disk

Example of goods that are NOT relevant goods:

  • capital goods (such as new equipment used in a business)
  • food and drink (such as lunches for staff)
  • vehicles or parts for vehicles (unless running a vehicle hiring business)
  • 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. This is noted to avoid any 
  • any services
  • laptop or mobile phone for use by the business, this is excluded as it is capital expenditure.
  • 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

Our Advice and your options

The new 16.5% rate for an LCT means that a business with wholly standard-rated sales is only getting £10 of input tax credit for every £1,000 of output tax charged to customers. It might be worth leaving the FRS on 31 March 2017. This decision should take into account the time-saving benefits of the FRS - is it worth paying more tax to retain these benefits? A business must notify HMRC of its decision to leave the scheme.

Below are three option and our advice on each option

Remain on Flat Rate Scheme

If you expect to have relevant goods in any of the VAT quarter or may be in 2 quarters, then you can stay in the scheme. The quarters where you will have relevant goods you will be Flat rata % based on actual rate.

You can also use the scheme if you don’t want the hassle of Stannard scheme and claim back your VATs you pay

If you are in first year, you will have slightly more benefit as you will still get 1% discount in first year. 

Join Standard Scheme

The first thing to note is that once you are out of flat rate scheme you won’t be able to go into the scheme again.

In standard scheme, you will be able to claim VAT on certain items i.e Mobile, Accounting cost, mileage (but train/air tickets don’t have VAT) etc 


This is good for clients who have costs where VAT has been paid. You would also need to keep each receipt and need to claim exact VAT amount so you cant just claim £5 per day for lunch and add VAT on it.

De-register for VAT

This is only possible for businesses earning less than £83,000 as these businesses are registered under volunteer registration. 

Once you de-register you won’t be able to claim back any VAT on your expenses but you wont have to submit VAT returns as well.

This is possible for clients with very low turnover and who don’t have any relevant goods or VAT on expenses to claim.


You only needs to have input tax of more than £10 per £1,000 of output tax to be better off with normal VAT accounting, i.e. output tax less input tax. It might be worth deregistering for VAT on 1 April 2017, especially if you have customers who cannot fully claim input tax, such as private individuals, many charities or a business with some exempt sales. The 20% VAT saving could be matched by a fee increase of, say, 10%, i.e. sharing the tax saving.

   LCT– 16.5%   Sector rate14.5%    LCT– 16.5%  Sector rate14.5%   LCT– 16.5%  Sector rate14.5%   
Example 1                   
 Total  Income  41,667  41,667    58,333  58,333    83,333  83,333  
 VAT 20%  8,333  8,333    11,667  11,667    16,667  16,667  
 VAT inclusive Income  50,000  50,000    70,000  70,000    100,000  100,000  
 VAT payable to HMRC  8,250  7,250    11,550  10,150    16,500  14,500  
 Saving  83  1,083    117  1,517    167  2,167  




This is a test