Flat rate VAT is great for some businesses, but not so great for many others – probably mostly service based businesses.
Unfortunately everyone sees the shiny low % to use with flat rate and think that’s great and you’re going to pay the tax man a lot less in tax, but many miss the small print (cause who reads that right🤷🏼♀️🫣), and get then get themselves into loads of trouble with HMRC 🙁
What’s the deal then? What’s the small print all about?
As with many good tax saving opportunities the government eventually cotton on that they’re missing out on potential tax and stop them! In April 2017 it was the VAT flat rate scheme that they changed, meaning many businesses were no longer able to use that lovely low flat rate percentage.
They brought in something called low cost trader or limited cost business. And it means that to use the % rate for your industry you need to spend a certain amount on physical, movable goods in your business. And if you don’t spend enough, then you are a low cost trader and need to use a higher % – which actually means you’d be worse off than using the normal VAT rules.
Who would be a low cost trader?
You’re a low cost trader if the amount you spend on relevant goods including VAT is either:
- less than 2% of your VAT flat rate turnover (sales figure)
- greater than 2% of your VAT flat rate turnover (sales figure) but less than £1,000 per year
So for example – if your sales are £10,000 per year then you need to spend over £200 per year on relevant goods or you’d be classed as a low cost trader.
Now this doesn’t sound a lot – but think about what you actually do spend money on – especially if you’re a service based business. And the list of what counts isn’t very big when you look at what you spend your money on!
What are classed as relevant goods?
Relevant goods are moveable items or materials exclusively used in your business. You can also include gas and electricity. If you’re estimating your annual spend then you need to use realistic figures.
It may be easier to start with what isn’t classed as relevant goods:
- any services – which is anything that isn’t goods
- expenses like travel and accommodation
- food and drink eaten by yourself or your team
- vehicle costs including fuel unless you’re in the transport business using your own, or a leased vehicle
- rent, internet, phone bills and accountancy fees
- gifts, promotional items and donations
- goods you will resell or hire out unless this is your main business activity
- training and memberships
- capital items for example office equipment, laptops, mobile phones and tablets
OK – so now for some examples of relevant goods:
- 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 – if anyone actually does this anymore??
- food to be used in meals for customers
- goods provided by a subcontractor and itemised separately
- goods brought into the UK if they are not otherwise excluded
- goods bought without VAT being charged, if they are not otherwise excluded – ie they don’t qualify for VAT (like stamps) or the person you’re buying from isn’t VAT registered (and therefore doesn’t charge you VAT)
Please note – this is not a full list but the most common ones.
So If I’m a low cost trader what % do I use?
The rate for a low cost trader is 16.5% – which doesn’t sound too bad – it’s better than 20% right?! But when you actually do the math you actually end up paying more than if you took your 20% charged on sales less your 20% of all your VAT purchases. So therefore we’d totally recommend just sticking to the standard way of doing VAT (although maybe use the cash version if you sell on credit and it takes a while for your clients to pay you – and you’re eligible of course!). You can read more on the different ways of doing VAT here.
What if I’m using the wrong flat rate %?
First off – don’t panic – we can fix this for you, but unfortunately it could mean having to pay a bit extra over to the tax man. We’ve had a few clients fall into this trap before they’ve joined us, so know you’re not alone and it is fixable. And HMRC won’t expect you to pay the extra tax in one go – especially if it goes back a while. You will be able to set up a payment plan to ease the burden on your cashflow.
Help – this all makes my head hurt!
We’ve got you covered, don’t stress 🙂We totally get that getting the right way of doing VAT is confusing, and you certainly didn’t set up your business to work out how to do your VAT returns! But we did – so let us take this stress off your shoulders so you can focus on what you do love to do. We can help make sure you’re set up in the right way so it doesn’t come back and bite you down the line.
Just pop over to our Get Started page, fill in the quick questionnaire and we can make sure you’re doing your VAT in the right way and keeping the tax man off your back.
