One of the most frequently asked questions from our clients on the VAT flat rate change for a limited cost business is:
“what is counted as ‘goods’ when determining if they need to use the higher rate of 16.5%?”
According to HMRC guidance, ‘goods’ are movable items or materials exclusively used in your limited cost business, e.g. stock for re-sell under your main business activity. It is also worth noting that you can also include gas and electricity if you have business premises.
What is excluded from business costs calculation?
To further clarify what cannot be included in the business costs calculation when determining the applicable flat rate percentage, HMRC has listed out the following items that should be excluded from your calculations:
- any services – which is anything that isn’t goods
- expenses like travel and accommodation
- food and drink – eaten by yourself or your staff
- 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
Most contractors offering their personal services to clients will be considered as a limited cost trader because they will not have goods for re-sell under their main business activity.
Figuring out which ‘goods’ count as costs
If you are our client, you should have already received a comprehensive report from us on the potential effect of the changes. You can also use HMRC’s online tool to calculate if you need to pay the higher rate and work out which goods count as costs.
For businesses that are going to remain in flat rate scheme, it is important to note that the limited cost business test needs to be applied to each VAT quarter (except for businesses that are on VAT annual scheme) when filing your VAT returns.
Examples to help businesses in determining their flat rate percentage
HMRC has provided the following examples to help businesses in determining their flat rate percentage:
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%.
As HMRC has stated in their own guidance:
‘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.’
Please do not hesitate to contact us if you have any further queries or would like to discuss this in more detail.