Rules around being a Limited Cost Business if you are on the Flat Rate Scheme for VAT (Part 2)


In April 2017, HMRC introduced a new fixed rate percentage of 16.5% for ‘limited cost businesses’ who use the VAT Flat Rate Scheme for VAT. 

Assuming you submit your VAT returns on a quarterly basis, you are a limited cost business if your
VAT inclusive purchases on relevant goods is less than 2% of your VAT inclusive turnover in any given VAT quarter.

What are relevant goods?
These costs are moveable items or materials exclusively used in your business. You can include gas and electricity.

Relevant goods do NOT include:

§  Any services
§  Expenses like travel and accommodation
§  Food and drink eaten by yourself or your staff
§  Vehicle costs including fuel, unless you are in the transport business and are using your own or a leased vehicle
§  Rent, internet, phone bills or accountancy fees
§  Gifts, promotional items or donations
§  Goods you will resell
§  Goods you will hire out (unless this is your main business activity)
§  Training and memberships
§  Capital items (i.e. costing more than £250 individually and is expected to be used for more than a year) like office equipment, laptops, mobile phones and tablets

Example of how to work out if you are a limited cost business
In this example, we are assuming you are a management consultant who has been VAT registered for more than a year and you have identified that your fixed rate percentage is 14%.

Let’s say your turnover in this particular VAT quarter is £20,000 (including VAT) and your purchases on
relevant goods in the quarter is £325 (including VAT)

The calculation is:

£325/£20,000 = 0.016 which is 1.6%

In this quarter, you would
not be able to apply your usual rate of 14% but would have to apply the limited cost business rate of 16.5%.

 You should do this ‘limited cost business’ rate calculation every quarter, as it is possible to ‘flip’ between your usual rate and the limited cost business rate.

Continuing with this example, if in the next quarter, your purchases of relevant goods are £500 (including VAT), the calculation is:

£500/£20,000 = 0.025 which is 2.5%

In this quarter, you would apply your usual rate of 14%.

If you think you may have been using the wrong flat rate percentage in your previously submitted VAT returns, you will need to adjust for the error in the next one you submit. There are rules around how to do this which are explained on The SAS Business Box. It's free to explore what The Box has to offer!
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